Learn The Law

Joint Tenancy

September 12, 2011 7:23:25 PM PDT

Many people add a relative to their real property by making them a joint tenant with a right of survivorship.  This means that upon death of one of the "joint tenants" the property such as: a house, condo, office building, apartment complex etc. does not transfer to the deceased tenants heirs but automatically transfers to the other joint tenant/tenants.

While this may be a seemingly effective method of transfer of real estate without probate, it does raise some concerns. The property is now subject to the debts of the person added as a joint tenant as well as any claims against that person that arise in the future.

In addition, there will be a loss in step-up in basis as it pertains to capital gains tax on half the property. Normally, if a person inherits property, their basis, i.e. the amount they declare as the starting value when they sell the property, is the value as of the date of death. An example would be where the decedent bought a home many years before for $75,000. The decedent leaves the property to a relative upon their death some 20 years later. At that time the property is now worth $250,000. The beneficiary’s basis would be the value on date of death, $250,000, and they would only pay capital gain tax on the sale for any amount over that sum. If in the same situation, the beneficiary was instead added as a joint tenant, for example 10 years before death of the original owner, and at that time the property was worth $150,000, that beneficiary would pay capital gains on a basis of $75,000 for the 1/2 given 10 years prior to death, and $125,000 basis for the 1/2 inherited by right of survivorship on death. Therefore, the beneficiary’s basis would be $200,000 and if the property had to be sold shortly after death for $250,000, the beneficiary would pay capital gains on $50,000 instead of zero.

Another disadvantage is that you cannot unilaterally take the person added as a joint tenant off the property if you later determine you do not want them to have the property any longer. You need their permission once added and they might not agree to do so. A Trust allows the owner complete control.

The person so added as a joint tenant could also demand you buy them out, and they could file an action in court for partition which will result in the property being sold and the proceeds divided with the joint tenant.

Finally, the transfer will be considered a present gift which needs to be reported on your income tax return reporting the value of the gift. While it will most likely be below the life time gift amount before you, as the donor, has to pay taxes, it will use up some of your Unified Credit on Estate Taxes.

While these issues may not always come into play in a joint tenancy transfer, there are a possibility and should be taken into consideration before you add a person on your real property as a joint tenant. Establishing a Trust can accomplish the same results in avoiding the costs and delays associated with a Probate proceeding, but a Trust leaves the original property owner in complete control of the property and not being subject to the disadvantages and concerns listed above.

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