Investing in real estate is a decision that requires careful thought and contemplation regarding issues of ownership and possession, which is when terms like joint tenancy and tenants in common come in the picture. One, or more than one, individual may be the owner of a property; couples may opt to hold the title to a property as community property wherein both partners have equal interest; or people may choose to establish a trust and transfer the ownership of the property to reduce tax burden. To deal with these and other such ownership scenarios, tenants in common and joint tenancy are legal arrangements that are widely followed.
What Is Tenants in Common
Regardless of their stake in the property, that may be equal or unequal, tenants in common, who are not required by law to be related, have equal rights of possession. In other words, one may occupy the property despite owning the smallest share even in the absence of other co-tenants. Upon death of a co-tenant, the heir inherits the erstwhile co-tenant's share while others maintain their status quo, unless the surviving co-tenants are named in the will, in which case they may inherit the deceased's share. Tenants have the right to buy out co-tenants provided the latter is willing.
Advantage
In certain cases it might be desirable to identify specific shares in a property for each owner to be able to leave his or her share in the property to a nominated person besides the owner. It is the preferred choice in such situations. Also this way of title holding allows a co-tenant to use his/her share of the property as a collateral for seeking loans. Thus providing the tenants the option of diversifying their portfolio of real properties by investing in different properties.
Disadvantage
One of the pitfalls is that the heir, who may not be a surviving co-tenant, may be disinterested in holding on to the property. The remaining co-tenants may object to the property being sold off and force the heir to file a partition action whereby the court is entrusted with the task of distributing the proceeds of the property that is sold as per court orders. Filing a partition action or buying out tenants will result in dissolution of the current arrangement of holding property.
What Is Joint Tenancy
Joint tenancy requires each tenant to have equal interest or ownership in addition to having equal rights of possession. The owners, who receive the title on the same deed and at the same time, have the right to break a joint tenancy, and create a tenancy in common, by selling their share of the property to another individual. Since it results in the decedent's share being passed on to the surviving tenants, it involves the right of survivorship. A property, that is held under joint tenancy, cannot be sold without the permission of all the tenants.
Advantage
The biggest advantage is that the surviving tenants inherit the property regardless of whether the decedent left a will or died intestate. Joint tenancy can help avoid probate, which is a lengthy and costly process, that may result in survivors struggling to establish their claim. Every will is thoroughly reviewed by a probate court. In case a person dies without a will (intestate), the process becomes even more cumbersome. It can help people avoid the pitfalls of the probate process. Another feature is equal responsibility towards discharging loans that have been procured using the property, that is held under joint tenancy, as a collateral.
Disadvantage
As far as disadvantages go, a joint tenancy may prove to be a costly mistake in case of broken relationships, both professional and personal, since joint tenancy does not permit one to sell or encumber one's share of the asset without prior permission from the other tenants. The asset in a joint tenancy is exposed to the creditors of all the joint owners. The property could be subject to seizure, sale or collection in case a joint owner has credit issues or files for bankruptcy.
Regarding which option is better, people interested in real estate investment should explore the available options, of procuring the title to the property, by comparing the pros and cons of tenants in common and joint tenancy. In the end it all depends on your individual needs and circumstances. Joint tenancies are the preferred option of many married couples because they want the property to pass automatically to the surviving spouse, if one of them dies. Besides they don't see any advantage in defining separate shares. The alternative of common tenancy is used in instances when specific share is desirable.
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