Joint Tenants or Tenants in Common?

This is one questions solicitors and conveyancers are constantly having to explain as most people immediately demand that they want to hold the property as joint tenants.

There is quite a difference between the two and you really need to understand the implications when entering into a contract, and the future sale of the property.

Someone I know was hit with a $17,000 tax billing following the sale of a property they had entered into as joint tenants with a family member instead of tenants in common.

In this example, they had used the capital in their own property to assist their family member to purchase a house and get off the rental round-a-bout. However, in hindsight, they should have been tenants in common with a 1% / 99% split instead of joint tenants.

Why? Although they never received a cent from the sale of the property (all the profit from the sale went to the family member), the ATO deems that they received 50% the proceeds of the sale which was subsequently added to their income for the year when completing their tax return. This then pushed them into the next tax bracket and, as no tax had been paid on the earnings, this resulted in the large tax debt. Fortunately, their family member agreed to pay this debt, but there could have been a very different ending to this situation.

Here’s another scenario, what happens when one party dies?

Most buyers immediately want to hold the property as joint tenants but when asked why, they have no idea. The main difference when one joint tenant dies is that the property immediately vests to the remaining joint tenant/s.

This means the surviving joint tenant gets all of the property:  this completely overrides your Last Will and Testament.

“So what?”, you may ask.  “It just means I don’t have to bother making a Will” you say.  If your residential property is your main asset, then true.  However, consider this interesting scenario (which is arising more and more now a days):

  1. Husband and wife hold property as joint tenants.  They have 2 children.  Let say for this example the husband dies.
  1. Both husband and wife have valid Wills leaving their respective estates to their 2 children.
  1. Regardless of the Will, the whole of the couple’s $1.2M property immediately vests in the wife (i.e. it is hers in her sole name).  Remember, practically, $600k is his estate and $600k is her estate.
  1. After a period of mourning, the wife meets a new man and remarries.  This man already has 3 children but he has no assets.
  1. After a few years, it is now irrelevant whether (1) wife dies or (2) wife and man divorce.  Their joint estate totals $1.2M and the man is entitled to a share of this, up to one half.
  1. Therefore, the wife’s $600k goes to her (and ultimately) her 2 children and $600k goes to man (and ultimately) his 3 children.
  1. The practical effect is that the dead joint-tenant husband’s half share goes to new man and his 3 children, despite what his Will says.  In essence, dead husband’s 2 children will miss out on a gift from their Dad that he worked hard for over his life and wanted to leave to his children to help them in life.
  1. If the couple had held the property as tenants in common, then dead husband’s Will would have preserved his estate and ultimately have been passed on to his 2 children.
  1. As now-a-days people are living longer and longer, this scenario is becoming more and more common.
  1. Also, “marriage” is no longer a critical factor.  Mere de facto relationships are sufficient.  Consider, if the wife and new man bought a new property together, then the new man would get the whole estate.

So, under what sort of tenancy do you hold your property?  And, do you have a valid Will? At least hundreds of thousands of dollars (and potentially millions of dollars) are in the balance.

Remember, if you need any real estate help or advice, we are just a phone call away.

All the best, Simon.

Source: Frank Cop, Cop & Co Solicitors

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