You don’t need us to tell you that the home buying process is a big deal. Most homeowners-to-be know that buying a home is one of the bigger financial moves the average person will make in their life.
What they might not realize, however, is that buying a home is a significant legal event, too. If you’re purchasing property with another person – whether that be a spouse, a relative or a business partner – you’ll both need to agree on how you’ll own that property in the eyes of the law. This decision can have major repercussions; not just for you and your co-owner, but for each of your respective heirs, as well.
Let’s take a look at one of the more popular ways for co-owners to hold title on a property: joint tenancy with right of survivorship.
Defining Joint Tenants With Right Of Survivorship (JTWROS)
What does this complicated-sounding legal phrase mean, exactly?
First, tenancy in this context shouldn’t be confused with the tenancy of someone who is renting an apartment. In title law, when we talk about tenants, we’re talking about people who own property.
In fact, there are a few different types of assets that can be held as JTWROS, such as a bank account, but for our purposes, we’re talking about it in terms of real estate ownership.
When joint tenants have right of survivorship, it means that the property shares of one co-tenant are transferred directly to the surviving co-tenant (or co-tenants) upon their death. While ownership of the property is shared equally in life, the living owners gain total ownership of any deceased co-owners’ shares.
When we talk about an individual’s legal right to a property, it’s referred to as “holding title.” JTWROS is one way for co-homeowners to hold title. Often, JTWROS involves just two people, though you can have multiple people in a JTWROS, with each having an equal right to the property.
Let’s say, for example, a married couple buys a house and holds title using this designation. While both co-owners are alive, JTWROS means that they both have an equal right to the property. Neither one can sell the home or put any sort of encumbrance on it (such as a mortgage) without the approval of the other owner.
What does “right of survivorship” mean? In a JTWROS, ownership transfers on death. When one spouse dies, their interest in the property is immediately given to the surviving spouse. It won’t go through probate, and it can’t be willed to any heirs.
It’s important to note that each state has its own rules regarding joint property ownership and estate laws. If you’re considering whether a JTWROS title makes sense for you, it may be a good idea to speak with an attorney.
Benefits Of JTWROS
Of all the ways co-owners can hold title on a property, JTWROS is often the most beneficial choice for married couples or anyone with an interest in jointly owned property who want to ensure that ownership is passed to their fellow co-owners upon their death.
The avoidance of probate makes this process of transferring ownership simple, as the probate process can be lengthy, especially if the co-owner died without a will.
Another benefit of this type of ownership is that each owner is equally responsible for the property, meaning that financial obligations are the responsibility of all the owners, rather than the burden falling solely on one person.
Drawbacks Of JTWROS
Of course, it’s important for co-homeowners to consider whether the automatic passing of ownership, without regard to a will or the owner’s heirs, is a benefit or a drawback for them personally. If you’d prefer the ability to will your property to someone else, this type of ownership may not be the right choice for you.
The shared financial responsibility for the property can also be a double-edged sword. If one co-owner isn’t able to make payments on the home, each of the owners is still responsible for making sure that all the financial obligations on the property are fulfilled. If the mortgage goes into default, for example, that will affect each owner, not just the one who wasn’t able to make their share of the payment.
Additionally, a JTWROS title can quickly turn into a headache if the relationship between the co-owners sours. Remember that each of the owners needs to be in agreement before certain actions can be taken on the property. If you own a property as JTWROS with someone else and you want to sell the property but your co-owner refuses, you won’t have much, if any, recourse.
Tax Implications For JTWROS
The tax implications of receiving shares in interest on a house you own after one of your co-owners dies can be complex, and can change depending on whether the co-owners are married to each other or not.
Once possible pitfall is if one owner dies and the remaining owner decides to sell the property, as the proceeds may be subject to a capital gains tax.
If you want to know what your specific tax liability could be, we recommend speaking with a tax professional who can look at your situation and give you personalized advice.
How To Enter A JTWROS Agreement
With a JTWROS title, all co-owners must acquire their equal share in the property through the same deed at the same time.
When you go through the process of purchasing a home, the buyers will need to decide how they want to take title. Because there are a few different options for how co-owners can hold title, each with its own benefits and drawbacks, you may want to talk to a lawyer about which option makes the most sense for you and your co-owners.
Other Types Of Shared Property Ownership
Let’s take a look at some of the other ways co-owners can hold title.
Tenants In Common
Tenants in common can hold unequal shares in a property. For example, one owner may hold a 70% share while the other only has a 30% share. Each co-tenant has the right to sell or transfer their share as they choose.
Tenants in common is a good choice for those who want to be able to will their share of the property to someone who isn’t a co-owner. With tenants in common, there is no right to survivorship.
Some states are known as “community property” states, which means that any property you purchase during your marriage belongs equally to both spouses. So, this type of ownership is only relevant to married couples in states where this law applies.
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are all community property states. Additionally, Alaska allows spouses to opt-in to this type of ownership.
With community property, both spouses automatically have an equal right to property purchased by either spouse during the marriage.
Unlike JTWROS, spouses with this type of ownership may will their interest in the property to another party. However, there is an option to include right of survivorship in this type of ownership, which would mean that the deceased spouse’s interest would be transferred to the surviving spouse upon their death, similar to JTWROS.
The Bottom Line
How you title your property with your co-owner can have far-reaching implications for everyone involved, which is why it’s vital to have an understanding of how each type of ownership functions. Again, if you aren’t sure which one makes sense for you, consulting with an attorney or a tax professional (or both) can end up being well worth it in the long term.
To learn more about homeownership topics like this, be sure to check out the Rocket Mortgage® Learning Center.