What Is Joint Tenancy?

joint tenancy is when two or more people have equal legal ownership of property. Joint tenancy co-owners are also called joint tenants. This type of property ownership creates what’s called a right of survivorship—if a joint owner dies, their ownership interest passes to the surviving joint tenants. 

Joint tenancy applies to different types of assets, from bank accounts to real estate. In real estate, often people enter joint tenancy when they buy a property. In these instances, the property’s deed lists both owners, giving them an equal share of ownership.

However, joint tenancy applies to real property—not personal property. Real property is land and anything attached to it. For example, a house and its one-acre lot constitute real property, while the furniture inside the home is personal property. 

Related laws vary by state. Currently, twenty-five states and the District of Columbia recognize some form of joint tenancy.

How Is Joint Tenancy Different From Community Property?

Some states consider things acquired during a marriage as "community property." This statute covers assets such as real estate that the married couple buys.

There are nine community property states:

  • California
  • Arizona
  • Nevada
  • Louisiana
  • Idaho
  • New Mexico
  • Washington
  • Texas
  • Wisconsin
In these states, courts apply shared ownership to everything acquired by a couple during their marriage, although specific laws vary.

The crucial difference between community property and joint tenancy is the right of survivorship. With community property, a married person can't pass property to someone other than their spouse. With joint tenancy, though, a co-owner can choose another beneficiary through a living trust or will. 

What’s the Difference Between Joint Tenancy and Tenants In Common?

Joint tenancy is one type of shared property ownership. Another is tenants in common (TIC). 

Unlike joint tenancy, most TICs don’t include the right of survivorship. And tenants in a TIC usually don’t have an equal ownership interest in a property. Instead, tenants in a TIC can own unequal shares of a property, even when they maintain equal rights to a property. They can also transfer ownership to another tenant.

Let’s say three people buy a house. Each wants equal rights to the entire property. But Person A pays for 60 percent of the property’s cost, while Person B and C each provide 20 percent. The owners enter into a tenants in common agreement. 

The TIC states that Person A owns 60 percent of the house, and Person B and C own 20 percent. If Person A dies, Person B and C do not receive Person A’s property ownership. Person A’s will instead determines the beneficiaries of their estate.

Any of the co-owners can transfer their ownership interest to another tenant. For example, Person A can transfer their 60 percent property ownership between Person B and C. Doing so leaves Person B and C with an equal share of ownership.

Another difference between joint tenancy and tenants in common is the method for terminating the agreements. A joint tenancy dissolves if a joint owner sells or transfers their ownership interest to another tenant. This action turns a joint tenancy into a TIC.

To disband a TIC, though, requires one of these options:

  • The co-owners sell the property.
  • A joint owner buys out the other co-owners.
  • The heir of a joint owner sells their ownership stake.

Joint Tenancy and Right of Survivorship

Joint tenancy plays a crucial role in estate planning. As mentioned above, joint tenancy provides co-owners with the right of survivorship. If a co-owner dies, their surviving co-owners receive their property ownership.

If the co-owners are a married couple, the surviving spouse becomes the sole owner of the property. If there are three owners, though, and one dies, the remaining joint tenants receive an equal share of property ownership.

The right of survivorship with joint tenancy also allows co-owners to avoid paying estate taxes. That’s because when a joint tenant dies, their ownership interest doesn’t become part of their estate. The estate tax comes into play only when all surviving tenants die.

For example, Person A and B own property in a joint tenancy. Person B dies, and Person A becomes the sole owner. Person A does not owe an estate tax. When Person A passes away, they bequeath their ownership interest to their children, who may be liable for estate taxes after inheriting the property.

Joint Tenancy and Legal Implications

There are legal implications of joint tenancy to consider.

First, as joint tenants own an equal share of an entire property, they’re also equally legally responsible for that real estate. For example, if a co-owner fails to pay their taxes, the government can place a lien on the property.

Also, adding someone to an existing joint tenancy can cost money in the form of a gift tax. A gift tax is a federal tax charged when an individual gives something of value to another person. 

People can receive gifts up to a certain amount, though, without triggering the gift tax. This amount—called a gift exclusion—varies by calendar year. In 2020, the IRS’s gift exclusion is for gifts up to $15,000 in value. Anyone receiving a gift exceeding this amount must pay a gift tax.

The IRS excludes most gifts between spouses if both are U.S. citizens. If not, in 2020, a noncitizen spouse can receive up to $157,000 in gifts from their citizen spouse.

A gift tax impacts joint tenancy if someone is added as a co-owner to an existing agreement. In this case, the new co-owner must pay a gift tax on the value of the property. Let’s say two joint tenants add a new co-owner to a house valued at $200,000. The IRS views this step as giving the new joint tenant a $200,000 gift, and they require the donor to pay a gift tax.

Another legal implication of joint tenancy relates to estate planning. Joint tenancy can have unintended consequences on inheritance.

For instance, two people marry in a joint tenancy state. Each has two children from before their marriage. The wife dies, and her husband inherits her house. He later dies without accounting for his wife’s children in his will or living trust. His kids inherit the property, not his wife’s, even though she owned the property before their marriage.

Or, two people co-own a property. One falls ill and is unable to make decisions. But the other tenant can’t make decisions about the real estate without their co-owner’s permission. Many joint tenants avoid this scenario by signing a durable power of attorney. Doing so gives the other owners permission to manage their affairs if they’re unable to do so.

There are many implications in deciding the right ownership structure for your property. And each scenario varies. You may want to discuss with an attorney to determine what’s best for you.

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Related terms
Equity
Equity is the difference between the market value of a property and the amount of money that is still owed on the loan. Equity can accrue naturally through the market or can be forced into the home based on improvements made by the owner.
Inflation
In simple terms, inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time.
APR
This stands for annual percentage rate and is charged to the borrower. It is expressed as a percentage that represents the actual yearly cost of funds over the term of the loan.