Joint Tenants vs Tenants in Common: Tax Differences
Jerry Chu
When buying property with someone else, your ownership structure - joint tenancy or tenancy in common - can greatly impact taxes, inheritance, and control. Here’s a quick breakdown:
-
Joint Tenancy:
- Equal shares only.
- Automatic transfer to co-owners if one dies (no probate).
- Only 50% of the property gets a step-up in basis for taxes.
- Common among married couples for simplicity.
-
Tenancy in Common:
- Flexible ownership percentages (e.g., 25%, 50%).
- You decide who inherits your share (requires a will).
- Each owner’s share gets a step-up in basis.
- Greater control - can sell or transfer your share independently.
Quick Comparison
| Feature | Joint Tenancy | Tenancy in Common |
|---|---|---|
| Ownership | Equal shares only | Flexible percentages |
| Inheritance | Automatic survivorship | Share goes to designated heirs |
| Estate Tax Impact | 50% of property value included | Only your share is included |
| Step-Up in Basis | 50% | Based on ownership percentage |
| Control | Requires unanimous decisions | Individual control over shares |
Key takeaway: Choose joint tenancy for simplicity and survivorship or tenancy in common for flexibility and tax advantages. Always consult a legal or tax expert to align your decision with your financial and estate goals.
Ten Minutes with Griffin, Episode 230: Joint Tenancy: Tax Perils
Main Differences Between Joint Tenancy and Tenancy in Common
The way you structure property ownership has a profound impact on how you and your co-owners manage, share, and transfer your investment. It’s not just about filling out forms - these decisions shape your rights, responsibilities, and what happens to the property if circumstances change. Let’s break down the key differences between joint tenancy and tenancy in common in terms of ownership, control, and inheritance.
Joint Tenancy: Equal Ownership and Survivorship Rights
Joint tenancy ensures all co-owners hold equal shares of the property. This setup comes with an important feature: automatic survivorship. When one owner passes away, their share automatically transfers to the surviving co-owners, bypassing probate entirely - even if the deceased had a different plan in their will.
However, joint tenancy has strict requirements, often referred to as the "four unities". These include unity of time, title, interest, and possession. Additionally, no single co-owner can independently sell or mortgage their share without the agreement of all others. This need for unanimous consent can make decision-making tricky, especially if co-owners disagree on the property’s future.
Joint tenancy is particularly popular among married couples. Why? It simplifies the inheritance process. If one spouse passes away, the surviving spouse automatically becomes the sole owner - no court involvement or lengthy probate procedures required.
Tenancy in Common: Flexible Ownership and Inheritance
Tenancy in common offers more flexibility, especially when it comes to ownership percentages. Co-owners don’t need to hold equal shares. For instance, one family might own 50% of the property, while two other parties split the remaining 50% equally. This flexibility makes tenancy in common appealing for diverse ownership arrangements.
Unlike joint tenancy, tenancy in common allows each co-owner to decide who inherits their share. This is often handled through a will as part of estate planning. Without a will, however, the deceased’s share will go through probate, which can be both time-consuming and costly for heirs.
Another major difference is individual control. Each co-owner can sell or transfer their share independently without needing permission from the others. This level of autonomy makes tenancy in common a preferred choice for investors or business partners who value operational freedom.
"Whether you're a married couple, business partners, or investors, selecting the appropriate ownership structure requires careful consideration of your goals and preferences. Consulting with a legal professional or real estate expert can provide invaluable guidance tailored to your unique circumstances, ensuring you make informed decisions that align with your long-term plans." - Troy Robillard, Premiere Plus Realty
The trade-off? Tenancy in common doesn’t include the automatic survivorship benefits of joint tenancy. If a co-owner dies without a will, their share must go through probate, which can delay the transfer process and add financial strain for the heirs.
These differences also have important tax implications, which will be discussed later. Choosing the right ownership structure today can shape your tax strategy, inheritance planning, and overall flexibility for years to come.
Tax Effects of Each Ownership Structure
Understanding how joint tenancy and tenancy in common impact your taxes is essential, as these ownership arrangements handle capital gains, property taxes, and deductions in distinct ways. Let’s break down how these structures influence capital gains and property tax responsibilities.
Capital Gains Tax: Step-Up in Basis and Property Sales
A step-up in basis adjusts the property's cost basis to its market value at the time of an owner's death, which can significantly reduce future capital gains tax. In joint tenancy between spouses, the IRS treats the property as 50% owned by each spouse for federal estate tax purposes. This means that when one spouse passes away, only half of the property receives a step-up in basis to its current market value. However, in community property states, married couples enjoy a full step-up in basis for the entire property when one spouse dies.
For tenancy in common, the rules differ. When one co-owner dies, only their ownership share is adjusted to the fair market value at the time of death. For instance, if you own 40% of a property as a tenant in common, only that 40% share gets the step-up in basis.
A notable example is the 1992 Gallenstein v. United States case, which showed that in joint tenancy, the surviving spouse could receive a full new basis for the property if estate tax deductions apply.
Interestingly, the Congressional Budget Office reports that over half of the benefits from the step-up in basis go to the top 5% of income earners. Additionally, when selling jointly owned property, each owner can utilize a capital gains allowance of $3,000. For the 2025/26 tax year, capital gains tax rates on residential property are set at 18% for basic rate taxpayers and 24% for higher rate taxpayers.
Next, let’s explore how these ownership types handle property tax responsibilities and deductions.
Property Tax Responsibilities and Deductions
Regardless of ownership type, all property owners share the responsibility for property taxes. In joint tenancy, tax deductions are usually split equally among the owners since each holds an equal share. For example, in a three-person joint tenancy, each owner might deduct one-third of the property taxes paid.
Tenancy in common offers more flexibility. Deductions are based on ownership percentages. For example, if ownership is divided as 40%, 35%, and 25%, each owner can deduct property taxes according to their respective share. The same rule applies to mortgage interest deductions, where joint tenants divide the deduction equally, while tenants in common claim amounts proportional to their ownership shares.
An important note: the ownership agreement must clearly outline property tax responsibilities. If a tenancy in common (TIC) agreement specifies a different allocation than the ownership percentages, that agreement determines how deductions are divided.
These tax considerations are particularly relevant in areas where fractional or TIC conversions are popular, such as San Francisco, Oakland, and Berkeley in California. For platforms like Lofty, which specialize in fractional real estate investments, understanding these tax rules can help investors optimize their benefits while ensuring clarity in financial obligations.
Estate Planning and Inheritance Tax Considerations
The way you structure property ownership plays a key role in estate transfers and tax responsibilities. Understanding these differences is crucial for aligning estate planning with your long-term financial goals.
Probate and Inheritance Process
Let’s break down how probate works differently under joint tenancy and tenancy in common.
With joint tenancy, the property automatically transfers to the surviving owner upon one owner's death, avoiding probate. This can save both time and money.
"When it comes to probate, one of the critical considerations is how property is owned and transferred after someone's death. Joint ownership can have significant implications for probate proceedings, especially in terms of how assets are passed to heirs."
However, this automatic transfer can lead to complications when selling or managing the property later on.
On the other hand, tenancy in common gives each owner full control over their share. This means each owner can specify who inherits their portion in a will. If no will exists, state probate laws determine the distribution. These probate differences tie directly into the tax implications discussed below.
Estate Tax Exemptions and Effects
Ownership structure also influences estate taxes. Assets that exceed the estate tax exemption threshold are subject to a 40% tax rate. For example, if the exemption is $325,000, any value above this limit could face taxation. Married couples, however, can often combine exemptions, potentially shielding up to $1,000,000 from estate taxes.
Spousal transfers are typically exempt from inheritance tax, regardless of whether the property is held as joint tenants or tenants in common. This means transferring property to a spouse or civil partner usually avoids tax.
Things get more complex when passing property to beneficiaries other than a spouse. Here’s how it breaks down:
| Ownership Type | Tax Calculation | Example (Property Worth $800,000) |
|---|---|---|
| Joint Tenancy | Half the property's value is added to the deceased's estate (assuming two equal owners) | $400,000 added to the estate |
| Tenancy in Common | Only the deceased owner's share is added to the estate | 30% owner = $240,000 added to the estate |
For instance, under joint tenancy, half the property’s value is added to the deceased’s estate. If the estate exceeds the exemption threshold, the additional value could trigger inheritance tax, especially if the estate lacks funds to cover the liability. In tenancy in common, only the deceased owner’s specific share is included. For example, inheriting a 25% share of a $600,000 property would result in just $150,000 being added to the estate for tax purposes. In cases where the estate cannot cover the tax, selling the property might become necessary.
Unmarried couples face additional challenges since they lack automatic inheritance rights. Tenancy in common offers more flexibility, allowing each partner to designate beneficiaries and clearly define ownership percentages.
Troy Robillard of Premiere Plus Realty underscores the importance of expert advice:
"Whether you're a married couple, business partners, or investors, selecting the appropriate ownership structure requires careful consideration of your goals and preferences. Consulting with a legal professional or real estate expert can provide invaluable guidance tailored to your unique circumstances, ensuring you make informed decisions that align with your long-term plans."
For investors using fractional ownership platforms like Lofty, these considerations are especially important. Choosing the right ownership structure ensures that your probate and tax outcomes align with your broader financial strategy.
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Real-World Applications in Modern Real Estate Investment
Fractional real estate platforms have reshaped how people approach property investment, bringing the decision between joint tenancy and tenancy in common to the forefront. These platforms not only open up new opportunities for investors but also provide clear advantages in areas like tax efficiency and estate planning.
Fractional Ownership and Tax Benefits
The tax-friendly nature of tenancy in common makes it particularly appealing for fractional real estate investments. Platforms like Lofty often use this structure to maximize both tax benefits and estate planning flexibility.
"Tenancy in common is a co-ownership structure that allows multiple individuals to hold separate, potentially unequal, interests in a property. It offers a lot of flexibility for multiple owners to own different amounts of a property."
With tenancy in common, investors can claim tax deductions based on the percentage of the property they own. For instance, if you hold a 15% share of a rental property through a fractional platform, you're entitled to 15% of the property’s tax deductions, depreciation, and other benefits.
From an estate planning perspective, tenancy in common provides the ability to assign specific beneficiaries for your share of the property. This means only your ownership portion is included in your estate. For example, if you own a 20% share of a $500,000 property, only $100,000 is factored into your estate’s value. This targeted approach can significantly affect both tax obligations and inheritance outcomes, as seen in the examples below.
Example Scenarios: How It Works in Practice
Let’s look at how tenancy in common plays out in real-world fractional investment scenarios, particularly through platforms like Lofty. These examples demonstrate the flexibility and financial advantages of this ownership model.
Scenario 1: Portfolio Diversification
Imagine an investor puts $200,000 into fractional shares, acquiring 25% stakes in four different rental properties. Under a tenancy in common arrangement, they receive rental income proportional to their ownership and can claim 25% of each property’s tax deductions, including depreciation and maintenance costs. If they decide to sell one of their property shares after two years, they only owe capital gains tax on that specific 25% share - not the entire property value.
Scenario 2: Estate Planning Made Simple
Consider a 55-year-old investor with $300,000 spread across fractional shares in several properties. With tenancy in common, they can assign different beneficiaries for each share in their will. Upon their passing, only the ownership percentages they held are included in the estate’s value for inheritance tax purposes. This approach can help keep the estate below the taxable threshold, reducing the financial burden on heirs.
These examples clearly show how choosing tenancy in common can influence both tax obligations and estate planning. By combining the benefits of traditional property ownership with added flexibility and lower entry costs, this structure makes real estate investment more accessible and practical for a wider audience.
Conclusion: Choosing the Right Ownership Structure for Your Goals
When it comes to tax planning and inheritance, the ownership structure you choose plays a major role in shaping your financial outcomes. Your personal goals, investment strategy, and estate planning priorities will guide whether joint tenancy or tenancy in common is the better fit.
Joint tenancy offers simplicity through the right of survivorship but may increase the taxable estate. On the other hand, tenancy in common provides flexibility with ownership shares and allows for more targeted estate inclusion. For married couples, tenancy in common even permits income to be taxed based on actual ownership shares instead of an automatic 50/50 split. These nuances make it possible to align your ownership choice with your broader financial strategy.
"Whether you're a married couple, business partners, or investors, selecting the appropriate ownership structure requires careful consideration of your goals and preferences. Consulting with a legal professional or real estate expert can provide invaluable guidance tailored to your unique circumstances, ensuring you make informed decisions that align with your long-term plans."
- Troy Robillard, Premiere Plus Realty
Consider the dynamics of your co-ownership, including relationships, financial contributions, and inheritance preferences. If you're sharing ownership with individuals outside your immediate family, tenancy in common often provides better tax efficiency and greater control over estate planning.
This distinction becomes even more critical when dealing with fractional real estate investments. Platforms like Lofty, which focus on fractional ownership, highlight the advantages of tenancy in common for achieving tax benefits and precise estate control.
Ultimately, consulting with a legal or tax advisor is essential to ensure your chosen structure aligns with your long-term objectives. The right decision can lead to meaningful tax savings and the flexibility needed to support your financial and inheritance goals.
FAQs
What are the tax differences between joint tenancy and tenancy in common, specifically regarding the step-up in basis?
The tax outcomes of joint tenancy versus tenancy in common differ quite a bit, largely due to how the step-up in basis rules apply. In a joint tenancy, when one of the owners passes away, the surviving owner(s) only get a step-up in basis for the deceased owner's portion of the property. In simple terms, only half of the property's value is adjusted to reflect the fair market value at the time of death. This partial adjustment can lead to higher capital gains taxes if the property is eventually sold.
On the other hand, tenancy in common treats each owner's share independently. When a co-owner passes away, their share gets a full step-up in basis to the current market value. This adjustment can significantly lower capital gains taxes upon the sale of the property. It's a key factor to think about when weighing options for estate planning and deciding how to structure property ownership.
How can tenancy in common benefit estate planning, and what are the inheritance tax implications?
Tenancy in Common and Estate Planning
Tenancy in common (TIC) offers a flexible approach to estate planning because it lets each co-owner decide who will inherit their share of the property. Unlike joint tenancy - where ownership automatically shifts to the surviving co-owner - TIC allows you to name specific heirs. This can be a key advantage when aligning property distribution with your broader estate planning objectives.
From a tax standpoint, the deceased owner’s share of the property becomes part of their estate, which could influence inheritance tax obligations. However, this structure also provides a way to reduce the taxable estate value by passing shares directly to heirs. This combination of tax management and control over asset distribution makes TIC an appealing choice for those looking to manage estate taxes while maintaining flexibility.
What should I consider when deciding between joint tenancy and tenancy in common for real estate investments, especially regarding taxes and ownership control?
When choosing between joint tenancy and tenancy in common for real estate investments, it's essential to consider how each option affects taxes and ownership control.
With joint tenancy, the key feature is the right of survivorship. This means if one owner passes away, their share automatically transfers to the remaining owner(s) without going through probate. This setup can simplify estate matters and potentially reduce transfer taxes, making it a common choice for couples or close family members seeking a straightforward way to transfer property.
On the other hand, tenancy in common offers more flexibility. Owners can hold unequal shares of the property, and there’s no right of survivorship - each owner’s share can be passed down to their heirs. This arrangement often appeals to investors who value having more control over their specific shares and decision-making.
The decision between these two structures depends on your financial objectives, your relationships with co-owners, and how much control you want over the property.
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