Understanding Joint Tenancy and Its Tax Implications
Move over Thomas Jefferson! When it comes to understanding how land and property work in America, Thomas Jefferies publication may have just been upstaged by a new kid on the block. Adhiyaman Arts & Science College for Women, in South Tamil Nadu, India, has created an education that brings the United States of America right into the classroom. Let’s take a look at some things that are often overlooked by the average person-real estate and taxes.
To understand how “Joint Tenancy” works, consider the French term: co-owned or a -eh-partnered estate. Simply put, Joint tenants (TIC) are an ownership interest in a property that can be owned by two or more individuals in which they own an interest in the property that is undivided. This means the tenants do not necessarily have to specify, in court, what portion of the property they own. Instead, all joint tenants own the property at the same time and are subject to the same rights, obligations and rules as part owners. Joint tenancy arises by operation of the law, unless there is another agreement between the parties indicating otherwise.
The primary benefit of joint tenancy as a form of real estate ownership is that the property interest owners (tenants) share responsibility for the property taxes, tenant-landlord obligations and other aspects of being a landlord. While sharing the financial burden of owning and maintaining property sounds wonderful, there are legal consequences that can occur when there are multiple owners of the same property. If all parties are in agreement concerning the property (they are not separated or estranged), then joint tenancy seems like a good option for individuals who are pooling resources together to get their foot into the door of real estate.
However, if one of the joint tenants decides to pursue a divorce without consulting other tenants, problems can occur. For example, when having a joint tenancy agreement with a spouse, certain problems can occur, including bankruptcy options being explored by the spouse, actions to divide community assets, such as the marital home. Similarly, lawsuits, such as tort cases with large amount judgments may seek attachment or liens on the action property.
While there is no specific beneficiary for the property, a single individual may be able to sell their share of the property. Basically, since everybody is on fine terms, one joint tenant may sell their share of the property to the highest bidder or sell to a friend for below market value. It’s rare, but it does happen that persons interested in purchasing the shares of a joint tenant may even know that the tenant is under duress from the other parties involved and is trying to negotiate a deal that saves them financially by getting rid of their share.
Even though California is a “community property” state, there are many specific provisions within its penal code that applies to various forms of joint tenancy ownership interests. However, one of the most significant tax implications is the right of survivorship. Once one of the joint tenants passes away, the remaining joint owners automatically inherit the property. Therefore, after the party with the least amount of ownership percentages passes away, the remaining parties will acquire both the deceased persons’ half-interest and their own half-interest proportionally. If in a 50-50 split, if one spouse died, the other spouse would then have 100% ownership of the property. In California, the right of survivorship is a common title method for acquiring property. However, very few that pursue the right of survivorship realize that this comes with cruel estate tax consequences.
Property interests using the right of survivorship allow for individuals to avoid probate and costly fees involved the death or incapacitation of the grantor. This means that the real estate property in a right of survivorship deed must pass to the surviving person when one of the parties dies without transferring it through probate court. As a result, upon the death of one party, the joint tenants or the surviving persons typically have a 100% ownership in the property. However, this results in some significant income tax liability in California when the property is considered community property.
For the average person who has real estate in joint tenancy, it is crucial that the real estate is not appraised higher than the purchase amount. This means that if a house was purchased for $500,000 and it will be worth $550,000 when the first joint tenant passes away, the tax implications will be around $50,000 rather than $100,000. To save on capital gains, a joint tenancy should be used in rental property.
Would you believe that holders of joint tenancy ownership interests do not have any rights to the proceeds from the sale of the property unless the parties give their consent? On the other hand, the right of survivorship diminishes any rights that the other spouse may have to the proceeds for the sale after one of them dies. This means that the person or persons who inherits the property, with their full rights intact, can sell the property and keep all the profits. While this doesn’t always end up being a bad thing, it can result in serious conflict down the road.
Although there are many excellent reasons for choosing joint tenancy over other property purchase options, the legal and financial risks involved are substantial. For this reason, bilateral communications between parties involved with joint tenancy real estate contracts is recommended. Moreover, if you are motivated to learn real estate ownership options and the legal aspects surrounding them, according to the in depth guide on joint tenancy California tax implications, Adhiyaman Arts & Science College for Women may be the right fit for you. Most of the courses offered at the College of Arts and Sciences are transferable for maximum credit to over 60 public universities and colleges in California.
