When you buy a property with more than one person, you have to make sure you choose the right property ownership structure. This can prevent legal battles and tax issues that can arise if one owner dies or relinquishes their share.
Joint Tenants Vs Tenants In Common
|Joint tenants||Tenants in common|
|Under joint tenants or joint tenancy, two or more people own the property together. Joint tenants hold the property jointly and equally. No single owner has individual rights in the property.||Under a tenants in common or tenancy in common structure, each person owns a share of the property. The share can be equal or unequal.|
|Each person has a 100% stake in the property.||Each person has a stake proportional to their share. So if you have a 50% share, you own 50% of the property.|
|If one of the owners dies, the ownership is transferred to the surviving tenants. This is known as a right of survivorship.||If one of the owners dies, the share is transferred to whomever was named on the will.|
|You cannot sell or transfer your share without permission and agreement||You can sell or transfer your share to someone else without permission from other tenants.|
|Usually, married couples or those in long term de-facto relationships buy property as joint tenants||Usually, siblings or friends buy property together as tenants in common.|
What Is Right Of Survivorship?
The right to survivorship means if one of the co-owners of the property dies, the ownership of the property will automatically pass to the surviving joint tenant(s). This happens regardless of any intentions mentioned in the will.
For example, if a husband dies, his share will automatically transfer to his wife.
The right of survivorship is available only for joint tenants.
Which Is Better, Joint Tenants Or Tenants In Common?
If you require assurance that upon the death of one owner, the property automatically passes on to the surviving owners, joint tenancy is the best option. However, if you already own property and need to add a partner to the title, a tenancy in common works better, you can apportion ownership to reflect the equity you’ve built.
However, the better option depends on your circumstances.
- Married couples usually choose a joint tenant structure, while new couples often choose a tenant in common structure.
- Siblings and friends generally prefer a tenants in common structure. They usually want their share to be transferred to their heirs, and not the other owners of the property, if they die.
- Business partners, investors and developers typically choose a tenants in common structure, as it provides clarity on how the profits and losses are split and keeps tax affairs more straightforward.
However, there are circumstances where a married couple might buy investment property under a tenants in common structure. For example, this arrangement is useful if one spouse earns a lower income than the other and you need to pay capital gains tax. As CGT is calculated based on your annual income, less tax is payable if the income is calculated on the lower income.
To help you choose the right property ownership structure, let’s go through the benefits and drawbacks of each option.
What Are The Advantages Of Being Tenants In Common?
- Ownership can be apportioned at your discretion. It can be a 50/50 split, 75/25 split or a 99/1 split. For couples with significant income disparity, this can have substantial tax benefits.
- A person’s share becomes a part of their estate when they die, and their will can dictate the transfer of ownership.
- Even if you own a smaller share of the property, you have access to the entire property.
- Since costs of living are high, tenancy in common often makes sense for residential property. The co-owners of the property can share the costs of internet, groceries, repairs and maintenance.
What Are The Disadvantages Of Being Tenants In Common?
- All the owners are equally liable for the debts and property tax
- A person might sell their share to a stranger. It only takes one person to force the sale
- Surviving owners do not automatically get the share of a deceased owner. It will go through probate.
What Are The Advantages Of Being Joint Tenants?
- There is a level of safety in numbers, since joint tenants are all responsible for paying off the mortgage and maintaining the property.
- Since there is a right of survivorship, a surviving co-owner automatically gets the share from the deceased.
What Are The Disadvantages Of Being Joint Tenants?
- If a co-owner suffers from financial issues, then the other owners in the agreement have to make payments on their behalf to prevent default
- Decisions regarding the property must be made with permission from all owners. No one can sell their share without consent from the other owners. Since the right of survivorship means the surviving tenants get the shares, this might lead to legal battles.
Tenants In Common Vs Joint Tenants, Tax Implications
Capital Gains Tax
If you own a property with other people, you need to establish the share and interest of the owners for capital gains tax purposes.
Under tenants in common, the capital gain or loss from the sale of the property is divided according to respective shares in the property. For example, if two friends hold a 65% and 35% interest in the property, the capital gain (or loss) is split 65/35. Under joint tenants, the split would be equal among all owners.
The property ownership structure does not matter. You will be considered joint owners either way and will all be responsible for paying the land tax.
The Australian Tax Office states that the income and expenses for tax purposes are allotted according to the legal interest in the property. Under a joint tenant agreement, each joint owner claims an equal percentage of the total tax reductions. For example, two people would each claim 50%, while four people would each claim 25% of the total tax deductions. Under a tenants in common agreement, deductions and claims are done according to interest in the property.
Frequently Asked Questions
Can I Change From Joint Tenants To Tenants In Common?
Yes, you can change from joint tenants to tenants in common. The process is known as severance.
There are many ways a joint tenancy agreement can be severed:
When the property is sold to a third party
When one joint tenant transfers ownership to the other in its entirety; this makes the other tenant the sole owner of the property.
When there is a relationship breakdown and the ownership structure changes to tenants in common
Once the joint tenant agreement is severed, each owner can dispose of their share as they wish.
You can also convert tenancy in common to a joint tenancy.
Can I Still Get The First Home Owner Grant Under A Joint Property Ownership Structure?
When you buy a property with someone else, you are eligible for the grant only if all the potential owners are first home buyers. If one of the owners already owns property, you might not qualify for the First Home Owner Grant.
How Does Joint Ownership Compare With Buying Property Solo?
Either ownership structure can affect you in different ways.
- If one person cannot keep up with mortgage repayments, other borrowers will be liable to pay, or you risk defaulting and losing the property. As far as lenders are concerned, you are liable for the total debt secured against the property if your name is on the property title.
- When you want to get another loan in the future, you need to declare all your debt, and not just your share. More debt means less borrowing power.
What If One Of The Co-Tenants Defaults On Mortgage Payments?
When you buy property together and are co-borrowers on the mortgage, each borrower is jointly and severally liable for the home loan. If one person defaults, then the other people listed on the mortgage will be held responsible.
If you own a share of a property as a tenant in common, a lender will look at the whole debt on the property as liability and not just your share of it.
Are you thinking of buying a home with your partner or friend? Think twice about the property ownership structure. While you might be able to buy a higher-priced property, you have to choose a structure that is right for your goals and financial circumstances. Our mortgage brokers are here to help. Call us on 1300 889 743 or enquire online.