If you and your spouse or partner, family member or friend propose to buy a home or investment property together, then you will need to make a decision on how best to co-own the property.
There are generally two options for co-ownership – ”joint tenancy” and ”tenancy in common”.
There are legal implications for each method of co-ownership, so it’s important that you understand what both options entail prior to making an ownership decision.
Typically, the decision between whether to own a property as joint tenants or tenants in common will need to be made in the following circumstances:
- De-facto couples purchasing a property together, especially when they will provide unequal financial contributions; or
- When one (or both) of the people purchasing the property has previously been married and has children from the earlier relationship; or
- Family members or friends intending to buy a property together, whether as a residence or an investment property.
The main features of each type of ownership can be summarised as follows:
Tenants in Common
- Each owner’s interest in the property will be separate from the other owners. It is a fixed percentage of ownership.
- Individuals who own an asset as tenants in common may hold unequal interests. For example, one owner may have a 20% interest and another the remaining 80%.
- In the event of death of one of the owners, their interest in the property will not automatically transfer to the other owner(s), but will instead form part of the deceased estate’s assets and will be distributed in accordance with the provisions of their Will. If a tenant in common dies without a Will, their interest will pass under his estate under the rules of intestacy.
- Each owner makes a capital gain or capital loss from a CGT event in line with their interest. If the property is sold (or any other CGT event occurs to it), the resultant capital gain or capital loss will be split between them according to their legal interest.
- If it is an investment property, the expenses and income will be allocated in proportion to the ownership.
- You could sell your percentage of the property and not affect the other existing owner.
- Under joint tenancy, each owner effectively owns the whole assets. In other words, each owner shares the ownership equally.
- On the death of one joint tenant, that person’s title or interest in the property automatically passes to the surviving joint tenant.
- On the death of all of the other joint tenants, the final ”joint tenant” becomes the sole owner of the property and has the freedom to gift the property to whoever they like in their Will.
- A capital gain or capital loss from a CGT event will be split equally between all owners of the property.
- Any income or expenses for the property will be shared equally.
- You cannot sell your ‘part’ of the property, if you were to sell a portion of the property, it would be both owners selling down.
If you decide to buy a property with someone else and your circumstances change, you can convert the joint tenancy into a tenancy in common, or vice versa. This is called “severing” the tenancy and it can be achieved by lodging a form with the appropriate government agency.
Transfer duty and tax are not payable if you unwind a joint tenancy or tenancy in common arrangement, as there is no change in ownership of the property, the only transaction cost is generally Government registration fees.
It is important to ensure that you have the correct ownership of your assets for your situation and you will need to consider the impact on your overall asset position, from an estate planning and asset protection perspective.
If you are not sure of the ownership structure of your property, then you can complete a search of the Certificate of Title for your property, which will show whether your property is held as joint tenants or tenants in common. You can arrange the search yourself or have a solicitor do the search for you. There is a cost involved with both options.
If unsure, it always pays to seek advice from a professional adviser.