What Is Joint Tenancy? A Legal Definition

Skyrocketing mortgage and loan rates can make aspiring homeowners and entrepreneurs rethink their real estate plans. However, that doesn’t have to be your reality. If you're looking to purchase a real estate property or start a business with your partner, business affiliate, or friend and are worried about finances, a joint tenancy could be a good solution.

This legal arrangement grants each party equal ownership of the purchased asset. Financial obligations are also equally shared among the owners. But this co-ownership agreement requires careful consideration as equal rights come with equal responsibility.

What is joint tenancy?

Joint tenancy is a legal arrangement between two or more people regarding their property ownership and rights. 

Distinct features of a joint tenancy arrangement are: 

• It can be entered into by married couples, family members, business partners, friends, relatives, or even domestic partners.
• Each owner has equal ownership interests and enjoys benefits from the property.
• It creates a right of survivorship, so if one of the owners dies, their share gets automatically transferred to the surviving owner, avoiding the probate process.

While joint tenancy can apply to personal property, business ownership, vehicles, and brokerage and bank accounts, this form of co-ownership is most commonly used for real estate investments. 

Legal requirements of joint tenancy property ownership

For joint tenancies to be valid, four legal requirements or "unities" must be met.

• Unity of time. All joint tenancy owners must acquire their ownership interest in the same property simultaneously.
• Unity of title. All joint tenants must acquire their ownership interests through the same legal instrument. They must have their names clearly marked as co-owners on the same deed or any other legal ownership document.
• Unity of interest. All joint tenants share an equal interest in property ownership. If four business associates want to purchase a plot of land for their factory, each business partner has a 25% ownership interest.
• Unity of possession. All tenants have equal right to possess and occupy the entire property. For instance, if two siblings purchase a farmhouse, each sibling can easily access and use the farmhouse.

The joint tenancy agreement is no longer valid if any owner fails to meet the four unities or one unity is broken. So, if one joint tenant sells or transfers their shares without the consent of the others, the joint tenancy is terminated.

How does joint tenancy work?

Let’s look at a real-world example of how joint tenancy would work if you and your spouse wish to buy a vacation cabin in the mountains.

Establishing joint tenancy

To create a joint tenancy ownership, most jurisdictions require that the criteria of four "unities" must be met. To form a joint tenancy, you and your spouse should:

• Obtain equal shares of the property using the same deed
• Acquire ownership interests in a property simultaneously and from the same document.
• Get your names listed as "joint owners with rights of survivorship" on a legally binding deed
• Ensure the ownership period is the same for each person (one owner can't own property for five years and the other for six)
• Pay an equal portion of the down payment and other property expenses
• Get an equal share of benefits or profits that come from the property 
• Give each equal possession and access to the entire property

A real estate attorney can help you satisfy the legal requirements and ensure proper documentation. 

Equal rights and responsibilities

Joint tenants have equal rights and responsibilities. This means each co-owner has identical privilege and authority to use the location according to their wishes without the other's consent. So, you can't restrict your spouse from using the vacation cabin or mandate that they use a designated portion of the cabin.

Additionally, joint tenants share all financial burdens. This extends beyond making an equal down payment—all property taxes, maintenance expenses, and mortgage payments must be split amongst the joint tenants. For example, if a room in the vacation cabin floods, both tenants must cover the repairs. Similarly, any income from joint ownership, like rent or capital gains, must be distributed to all.

Right of survivorship

What's unique about a joint tenancy vs. tenancy in common is that it creates the right of survivorship. In simpler terms, this means that if one tenant dies, the surviving joint tenant automatically assumes the ownership rights. So, if your spouse dies, you, as the surviving spouse, will become the sole owner of the vacation cabin.

The right of survivorship eliminates the need for the property to undergo the probate court system, where the deceased owner's will is examined and assets are distributed to family members.

Dissolving joint tenancy

As they say, “life happens” and there might be cases where the joint tenancy needs to be dissolved. A common reason for severing a joint tenancy is to ensure that one's ownership portion gets passed to their children instead of the surviving tenant.

This process—legally known as severance—can occur in a few ways:

• Voluntary agreement: All owners sign an agreement to terminate or convert the joint ownership to a tenancy in common.
• Conveyance: One owner sells ownership interest to a third party and becomes a tenancy in common. The remaining tenants may have the authority to review and approve the tenancy in common owner.
• Serve a legal notice: A joint owner can break the tenancy without the other's consent by sending a legal notice. However, this is an expensive and lengthy legal process and going this route can unnecessarily strain your relationship.

The specific laws on breaking a joint tenancy vary from state to state. An estate planning lawyer can advise you on your state's severance process and highlight any financial and tax implications it may bring.

Joint tenancy: Pros and cons

There are two sides to every coin, and while joint tenancy has its pluses, it can also create certain problems. It's important to understand both sides before deciding whether this form of joint ownership makes sense for you.

Pros

Joint tenancy offers a range of valuable benefits, especially for those family members or investment partners who want to share asset ownership and prefer simplified transfers and shared responsibility.

• Home affordability. Joint tenancy makes it easier to purchase a home. In situations where your individual income or credit score isn't sufficient to take out a loan, having other owners with more income and credit rating increases your buying power and gives you a better interest rate. For lenders, joint tenancy presents less risk than tenants in common. If a person defaults on the mortgage, the other party is still on the hook for making the payment, therefore lenders are more likely to approve the loan in the first place.
• Avoid probate court. If one of the joint tenants dies, the remaining joint tenants acquire the deceased tenant's share without having to go through the time-consuming and expensive probate process. In common tenancy, the probate court may freeze the deceased owner's assets until they decide on the new owner. In joint tenancy, the surviving owner doesn't have to wait for the will to be verified for assets to be released. They can immediately move into the shared property.
• Shared decision-making. Co-owners in joint tenancy share the decision-making process and can learn from each other's knowledge and perspective. This set-up encourages cooperation and communication, leading to better decisions and stronger relationships.
• Equal ownership and responsibility. All owners have shared ownership and responsibility over the asset. This ownership arrangement encourages a common goal and sense of commitment where each will act in the best interest of the property. Furthermore, shared liability (mortgages, maintenance, and loans, etc.) eases the financial burden on each individual owner.

Cons

Of course, there are some trade-offs to co-owning property through a joint tenancy.

• Restrictive. Joint tenancy can be restrictive as all owners should be on the same page regarding what to do with the property. For instance, you can't decide to mortgage the vacation home without consent from your joint tenant.
• Difficult to pass assets in divorce. Splitting assets in a difficult situation like divorce or legal separation gets even messier with joint tenancy. Assets owned jointly are strictly off-limits, either partner can't sell any asset without the consent of the other.
• Potential for disputes. Multiple owners, each of whom with a different goal for the property, creates an opportunity for conflict. Likewise, if one party is not holding up their part of the agreement, it can financially impact your investment.
• Increase in creditor claims. Joint tenancy doesn't protect the property from an individual owner's outstanding debts and liabilities. For example, if one joint tenant has taken out a sizable loan, the creditor may seek to recover their money by forcing sale of the property. This can put the other tenants at risk.
• No control over assets post death. A joint tenancy deed takes precedence over a last will. If a joint tenant dies, the remaining tenants can decide who will get the deceased's ownership. So, if you hope your shares go to your child after your death and have signed a last will stating that the surviving owners still have no legal obligation to follow your wish.

How to decide if joint tenancy is right for you

Get legal advice

Property purchase and estate planning are complex and dynamic areas of law. While joint tenancy is an efficient way of succession planning, navigating it can become restrictive. Working with a lawyer will help you set things right from the beginning, saving you a lot of stress, money, and confusion.

A LegalZoom lawyer will look at all corners of this major life commitment and provide you with the comprehensive advice and protection you need. Some attorneys may even suggest signing a joint tenancy operating agreement to clarify expectations and responsibilities.

Consider nature of your relationship

Joint tenancy is ideal for those who share a stable, long-term relationship. Spouses, parents, siblings, or even business associates could be perfect. Why? The right of survivorship clause will automatically pass your portion of the property to the surviving partner, no questions asked. This requires a high level of trust. Giving such a significant investment to someone you have a tumultuous relationship with is risky.

Also, since all decisions must be made together, forming a joint tenancy with someone you get along with and who shares the same set of values and financial outlook will lead to a smoother ownership experience.

Assess financial capacity of each owner

Each joint tenant needs to shoulder an equal share of the financial burden. Therefore, it's advisable to examine each interested owner's financial statement closely. Exchange all information that will give a clear picture of one's ability to pay, including bank statements, loan histories, and investment portfolios. Look at alternative forms of ownership if you sense that one party is being sneaky about their finances or is hiding liabilities.

Consider flexibility of ownership

In joint tenancy, you can't buy or sell your ownership without consent from the others. Neither can you control who will get your share after your death. If you find the rigidity of this unappealing or have children and other beneficiaries and seek more control over who gets your inheritance, explore other ownership methods. Tenancy in common allows an owner to will their share to their children or other beneficiaries.

Research tax implications

Joint tenants are subject to federal and state taxes. For instance, if you sell the property and make money off it, all owners have to pay part of the capital gains tax. Certain tax implications depend on whether the joint owners are married.

• Married couples: Transfer of property between spouses doesn't generally incur gift tax, which is advantageous for tax burden. Depending on where you live, joint tenancy can give married couples a significant capital gains tax break because of the step-up of basis rule. However, spouses should also know that the automatic transfer of assets can impact how much each person can shield from their estate taxes.
• Not married owners. The transfer of assets after one joint tenant's death can be considered a "gift" by the IRS if they are not married. If the asset valuation exceeds your state's gift tax exemption limit, the surviving tenant might be liable to pay a gift tax. Also, the entire property's value is considered part of the first deceased owner's estate value. If they have a significant estate, their estate tax liability would increase.

Tax laws are complex. Consult a tax attorney to evaluate your options and choose a solution that saves you time and money.

Plan an exit strategy

Even when joint tenants don't intend to break their shared ownership, it's best to plan for scenarios that might involve a split. Proactively considering these will help you create processes and procedures that will ensure a smoother and safer ending if it comes to that.

Establish an estate plan

As mentioned earlier, a joint tenancy deed supersedes the last will of the deceased owner. If you are not okay with your stake going to the surviving owners and want a say in who gets your assets, you may be better off becoming a tenant in common. A clear estate plan will also help your heirs and beneficiaries minimize their tax burden.

FAQs

What's the difference between joint tenancy vs. tenancy in common?

The key differences between the forms of co-ownership are the right to survivorship, ability to make decisions without each other’s consent, and ability to hold different ownership percentages. For instance, in a tenancy in common, you can list that your stake be passed on to your heir. And, if even you own just 45% of the property, you still have an undivided interest in the property and can have the entire property available for your use.

Can a joint tenancy be changed?

Yes, it's possible to change a joint tenancy into a tenancy in common or a single ownership. To convert to a tenancy in common, one or both owners need to execute a transfer or quit deed. To gain full ownership, one party needs to transfer their share to the other. Both processes are complicated and could have tax implications; an attorney is best equipped to guide you.

What to do if one joint tenant isn't fulfilling their responsibilities?

Each joint tenant must contribute to property expenses like maintenance, taxes, and mortgage. If one joint tenant stops paying, the other joint tenants may need to step in and fill the gap to avoid more financial issues. However, legal action can also be taken to enforce the ownership agreement.

Is joint tenancy good for estate planning?

Joint tenancy is an attractive option for estate planning, but it's not the only one. One of the main reasons to opt for joint tenancy is to avoid probate and speed up asset transfer. The flip side is that once the last joint tenant dies, probate is inevitable unless the assets are held in a trust. Joint tenancy can also complicate matters if a relationship sours because you can’t make a decision without the other’s approval. An estate attorney can help evaluate whether joint tenancy satisfies your estate plan goals.