Owning a property in Australia is becoming increasingly expensive and as a result, many homeowners are turning to different ownership options. Co-ownership exists where there is combined ownership of two or more people over one lot such as a residential townhouse or commercial building. In a property law context, this is two or more corporations or natural persons owning one lot of land. This differs from different people owning different lots with shared communal spaces. Two of the main options of co-ownership turned to are joint tenancy or tenants in common. Each of these arrangements includes different legal and financial terms for tenants in Australia. Understanding these terms is important, in case any unforeseeable events occur that change that person’s ability to co-own the premises. Read on to find out more about joint tenants vs tenants in common in Australia.
What is joint tenancy?
Joint tenancy is a form of property ownership that gives equal interest to each person listed on the property title. It is equal because both tenants essentially own the property in its entirety. In this type of co-ownership, the right of survivorship exists for each joint owner if any unforeseeable events occur. As an example, this means that if one joint tenant was to pass away, the property is automatically vested into full ownership of the other tenant and the pre-existing joint tenancy cannot be filled by directions in the deceased’s will. Therefore, it is important to consider being a joint tenant as a property owner because it will affect the planning of your estate as well as your will. Joint tenancy is most common in de facto, married partnerships because typically, these relationships are happy to share ownership of most assets of all types of property and combine finances to buy.
Joint tenancy can be further understood under four unifying characteristics:
- Title; and
The first of these is the unity of possession. This means each of the owners is entitled to the possession of the entire property; this is for a shared, mutual use and not exclusive use of each owner. The second unity of interest means the ownership for each co-owner is the same in nature, extent, and duration. This means that there should be no difference in the percentage of ownership or different treatment of each other as they possess the same rights for the same amount of time. The third unity of title means that each tenant should be able to derive their interests from the same document such as a transfer document. The final unity of time suggests that all tenants must have their co-ownership in the property vested at the same time.
When does a joint tenancy end?
Departing from an agreed joint tenancy can be challenging. If not approached appropriately and discussed with each tenant’s concerns, it can lead to obtaining legal support. Some situations that could lead to this include:
- Joint tenants choosing to sell the property;
- One tenant transfers their share of the property to an existing joint tenant; or
- One tenant tries to force a sale if co-owners cannot come to an agreement.
When forming a joint tenancy agreement which provides the right of survivorship, it is important to ensure the other tenants are people that you trust and have your best wishes in mind. The law will generally assume that your purchase is a joint tenancy if two or more parties are involved, so remember to specify if this form of property ownership does not suit you.
What is tenancy in common?
Tenants in common own a defined share in the property. This is not a literal share, but a share of the ownership rather than the property in its entirety. In contrast to joint tenants, this share in ownership can be unequal as well as equal. For example, you can own an 80% share and the other tenant can own 20%. Because the ownership limits you from possession of the entire lot, there is no right to survivorship. If any unforeseeable event occurs in a tenancy in common, such as one owner passing away, then this percentage of ownership can be passed on through their will or other arrangements and will not change the percentage of ownership for the other tenant in common. Therefore, it is important to consider being a tenant in common as a property owner because it will allow you to have absolute control over who will receive your purchased share separate from the other owners.
This form of ownership is typically more common for investors or people with adult children entering second marriages, who want their ownership based on the varying contributions of finances towards that property, this will allow them to dispose of or pass those shares as they wish. A spousal relationship may also choose this form of ownership to reflect a higher and lower-earning spouse. This may be beneficial as the higher-earning spouse may contribute more to the house and also be able to pay a higher tax for the property. These tax implications are further discussed below.
What are the tax implications of joint tenants vs tenants in common?
On top of the discussed pros and cons of these forms of co-ownership, they also provide different tax implications. For joint tenants, who own equal ownership of the entire property, their tax liability is split evenly (50-50). On the other hand, tenants in common who have specific and potentially unequal shares will have a tax liability to reflect this share. Using the above example, an 80% share with have an 80% tax liability with the other 20% contributing their 20% in tax.
Should you register as joint tenants or tenants in common?
Clients often ask what is the better way to be registered on the title of their property. The answer can be found by asking yourself the two questions below:
- What do you want to happen to the property upon your death? Do you want it to go to the surviving owner on title or someone else?
- What are your plans for the property? Is it you home or investment? If it is an investment property do you need to do tax planning?
Once you answer the above two questions it will become clear what is the better option for your circumstance.
If you require further assistance with anything related to joint tenancy or tenants in common, you should seek legal advice. Legal Kitz can direct you with your next step, whether you need assistance drafting a written agreement in case a tenant in common dies, or if you are unsure of whether to share joint tenancy with another party. Our Legal Kitz business specialists can assist with ensuring that your concerns are addressed, and can provide you with advice that is tailored to your situation. You can book a FREE 30-minute consultation via our website now.