Financial Tips: Investing in Tenancy in Common

Tenancy in Common is joint ownership of property where property ownership does not pass to other joint tenants in the event of death unless specifically stated through legal documentation. Joint tenancy in common is not the same as joint tenancy which is subject to ‘rights of survivorship’ by the other joint tenant(s) regardless of willed property.

Joint tenancy in common ownership can be subject to more extensive legal stipulations than more rudimentary forms of ownership. Taxation of property held in joint tenancy in common may also be regulated by different tax codes depending on the type of property.. Two typical examples of joint tenancy in common are illustrated below:

  • Joint Tenancy of Real Estate: When two or more people have joint tenancy of a property they may both own a percentage share of the asset value of the home but not a distinct portion of the physical property.
  • Liquid Capital Joint Tenancy: Unlike joint tenancy in housing, joint tenancy of liquid assets such as stock investments is not always subject to the same requirements. In this case joint tenancy may only imply joint ownership with no distinction of how much of the asset each owner owns.

Joint tenancy is subject to various benefits and disadvantages that are not typical of other types of asset ownership. These factors are ideally considered before entering joint tenancy contract(s) and are illustrated as follows:

Benefits of Tenancy in Common:

  • Tax advantages: Joint tenancy in common has post-mortum tax advantages. That is, if one is planning from after (s)he dies, there can be an increase in the applicable property deductions an inheritor of the property is able to utilize. More deductions usually mean lower taxation.
  • Leveraged Investment: Since joint tenancy is not full ownership it does not require the same amount of financing. This can allow one to become ownership in multiple properties, in affect leveraging the money one would have used for one home for ownership in several homes.
  • Financing: Obtaining mortgages for joint tenancy may be easier due to the smaller amount of capital required. This can make home ownership a more realizable goal for those with less capital.

Disadvantages of Tenancy in Common:

  • Beneficiaries: Unlike in joint tenancy, joint tenancy in common may pass property onto heirs, beneficiaries or family members as with traditional ownership. While this may be an advantage to those stated in a will, it may be a disadvantage to other joint tenants who’s interest do not match that of the new owner.
  • Complication: Since joint tenancy may involve many owners, the rules of ownership can become complex as each owners interest must be represented and adhered to within the parameters of the contract.
  • Financial Risk: If one owner in the joint tenancy experiences financial difficulties requiring a financial institution to seize assets or foreclose property this could adversely affect other joint tenants. This applies to joint ownership of both home property and liquid assets.

Items to Consider Before Joint Tenancy in Common:

Joint tenancy is a form of asset ownership that requires certain prerequisites to ensure a financially stable ownership. Generally, this type of ownership should meet the following pre-conditions:

  • Mutual Trust: Joint tenants ideally trust each other as they are more or less business partners.
  • Financial Stability: Each partner in the joint tenancy will likely be more stable joint tenants if their financial situation is strong to begin with.
  • Contract Specifications: To prevent future problems and complications, the tenants should have at least a verbal agreement as to how the property will managed and utilized. A written contract is preferable and more legally binding.
  • Team Work: The larger the pool of tenants in the agreement, the more amount of cooperation and understanding may be needed. The ability to perform as a team could be beneficial in this type of ownership.

When making the decision to become a joint tenant it is important to realize it is not a solo venture and may involve some complex legal caveats and provisos. Knowing as much as possible before entering a contract of joint tenancy in common could be advisable to avoid mis-judgment or faulty ownership intention. Having sufficient foreknowledge of potential circumstances is especially true in regard to real estate which can involve title issues, easements, mortgage insurance, natural hazards etc. The same freedoms and benefits of sole ownership are not present within a joint tenancy in common ownership. However, once the initial ‘disadvantages’ of joint tenancy in common are understood, this type of ownership agreement can be a potentially profitable and rewarding venture.

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