When it comes to sharing property with another person, there are a few different forms of legal ownership to choose from. Of these, two common shared estate ownership options include joint tenancy and community property. Though these joint tenancy and community property are very similar in many ways, there are a few important differences to note when it comes to planning your estate and protecting your interests. Let’s take a look at what each entails and which might be better for your specific situation. A financial advisor can offer valuable insight into property ownership arrangements that fit your goals, risk profile and timeline.
Joint tenancy is a legal arrangement between two or more people who wish to share ownership of real property. Each owner in a joint tenancy arrangement holds equal ownership and has equal rights to the property. In turn, each owner has full rights to the property and can make changes without the other owner’s permission.
Most married couples hold their property – such as the family home, vehicles and joint bank accounts – as joint tenants. It’s a simple ownership method and neither individual can leave their share of the property to anyone else in such an arrangement.
Right of survivorship is provided in joint tenancy. This means that if one tenant dies, his or her share will automatically go to the other owner(s) of the property. Because of this, probate is avoided and the property will pass on to the surviving owner(s) without delay or added expense. However, probate is not avoided if both owners pass away at the same time, or if the last remaining owner passes away and leaves the property for his or her heirs.
When it comes to debt liability, joint tenancy does offer some protection. Creditors can make claims against the property regardless of which borrower they’re looking for, but unless the debts are also shared, creditors can only make a claim against the portion of the property that the debtor in question owns.
Property held in joint tenancy will receive a step-up (or step-down) basis on one-half of the current fair market value when an owner passes away. The step-up basis will only be applied to the half that was owned by the now-deceased spouse.
This means that if one spouse passes away and the other decides to sell the property, he or she will be responsible for capital gains taxes on their share of the property, but not the deceased spouse’s half.
Community property is another form of shared property ownership, but it is only available between a husband and a wife. Both parties hold equal, shared ownership of the property, regardless of who contributed what to the purchase.
Right of survivorship is also offered with community property, meaning that if one spouse passes away, their share of the property’s ownership will pass to the surviving spouse. This allows spouses to avoid the probate process and retain control of the property at all times.
When it comes to community property, creditors can make claims against shared assets if a debt is owed by either party. This means that even if your spouse is the one who owes said creditor, your community property is considered liable as a whole.
Unlike with joint tenancy, the half of the property owned by the non-owing spouse is not protected.
With community property, the step-up basis (or step-down) will be applied to the entire property upon one spouse’s death. This means that if the property has appreciated in value, and then one spouse passes away, the other spouse can sell the property shortly thereafter without being responsible for capital gains.
So, how do you choose between holding an asset through joint tenancy or as community property? Here are a few things to consider.
Where you live. There are only nine community property states at the moment. If you don’t live in one of these states, joint tenancy is your remaining option.
How you want taxes applied. With community property, the step-up basis applies to the whole property; with joint tenancy, only the deceased tenant’s half receives the step-up basis. This can have serious tax implications if and when the surviving tenant sells the property.
Whether you want protection from creditors. Community property is considered fair game for liabilities, so creditors can come after the asset regardless of which spouse owes. With joint tenancy, however, creditors can only lay claim to the owing spouse’s share of the property, which the non-owing spouse’s share is protected.
Both joint tenancy and community property offer shared ownership of real property, such as land or structures on land, though community property is reserved for spouses. Community property is only available in select states, allowing them to hold a shared (rather than divided) interest in an asset. Joint tenancy divides a property’s ownership into equal shares. Each ownership option has its own rules regarding capital gains. Both ownership options are also unique in terms of creditor liability. It’s important to consider your priorities before choosing an ownership option.
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