The 10 Dangers of Owning Property in Joint Tenancy

What is joint tenancy?

“Joint tenancy with right of survivorship” means that each person owns an equal share of the property. When one owner dies, that person’s share immediately passes to the other owner(s) in equal shares, without going through probate. The premise of joint tenancy and the basis on which it is promoted is  that joint tenancy is a simple and inexpensive way to avoid probate. At times this is true, but there are court cases that undermine that premise and there are times when it simply is untrue.

The tax and legal problems of joint tenancy ownership are confusing and are filled with a maze that is hard to traverse.

The dangers of joint tenancy include the following:

1.Only delays probate. When either joint tenant dies, the survivor — usually a spouse or child — immediately becomes the owner of the entire property. But when the survivor dies, the property still must go through probate. So joint tenancy doesn’t avoid probate; it simply delays it.

2. Probate when both owners die together. If both owners die at the same time, for example, in an auto accident, the property must still go through probate.

3. Unintentional disinheriting. When blended families are involved, with children from previous marriages, here’s what often happens: the husband dies and the wife becomes the owner of the property. When the wife dies, the property goes to her children, leaving nothing for the husband’s children.

4. Gift taxes. When you place a non-spouse on your property as a joint tenant, you make an immediate gift of one-half the value of the property. For example, when a mother retitles her $80,000 home in joint tenancy with her son, she has just given her son a $40,000 gift. The annual exclusion amount is not counted. However, the law requires that she file a gift tax return since the gift exceeds the annual exclusion amount. The good news is that  she does not have to pay the taxes until she has used up her gift tax exemption which in recent years, has been quite high.

5. Loss of income tax benefits. If a person inherits a home through a will or living trust, the heir can sell the property without paying any income tax. But when a property has been held in joint tenancy, the surviving owner does not get a step up in tax basis for their interest in the property. Only the decedent’s one half does. This can be a costly mistake.

6. Right to sell or encumber. Joint tenancy subjects the property to each owner’s financial dealings. Either joint tenant has the right to mortgage or sell his half interest. However, what you are likely to find is that you cannot sell or mortgage the property unless the joint tenant will cooperate with you.

7. Liens and Bankruptcy.  If either owner fails to pay income taxes, the IRS can place a tax lien on the debtor’s interest in the property. If either owner files for bankruptcy, the trustee can sell that person’s interest in the property. In fact, the trustee in bankruptcy might be able to sell the entire property.

8. Creditors.  If either party has a judgment entered against him, such as from a car accident or business dealings, the holder of the judgment can and will execute the judgment against his interest in the property.

9. Incapacity. If either joint owner becomes physically or mentally incapacitated and can no longer sign his name, either a power of attorney must be used, or  the probate court must give its approval before any jointly owned property can be sold or refinanced — even if the co-owner is the spouse.

10. Joint Tenancy is not Joint Tenancy under California Law for many spousal situations. If the spouses acquired the property during marriage, it is presumptively community property. In Re Brace case. Unless the spouses entered into a written transmutation agreement and record it, the property will not be characterized as joint tenancy but as community property for creditor, bankruptcy and some other purposes.