Joint tenancy is old fashioned and dangerous. Is tenants in common better?

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Joint tenancy is old fashioned and dangerous


Joint Tenancy vs Tenants in Common

Tenants in common: each owner holds their discrete share of the asset outright. It can be 20% and 80%. Or can be 50% and 50%. Or is can be 34%, 6% and 60%. But it must equal 100%. When a tenant in common dies your interest in the asset goes into your Will. It does not go to the other co-owners.

Joint tenancy: the owners share ownership of the asset equally. It is an ‘undivided interest’. Each owner owns the whole asset. Therefore, if there are two owners they must hold the property 50/50. If there are three owners then it must be a third each. If their interests are unequal then you do not have a joint tenancy. (You would have a Tenancy in Common, instead.)

Together, all owners own 100%. There are no separate interests. At death, the remaining owners take the dead owner’s interest automatically.

In other words, the dead person can not get the joint tenancy asset into his Will. He cannot pass his share of the asset under their Will. This is because it automatically passed to the remaining owners. The last owner to die takes the whole asset.

People often try and leave a joint tenancy asset into their Will. The gift just fails.

ATO treats joint tenancy assets as tenants in common

Under section 108-7 Income Tax Assessment Act 1997, individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common.

Joint tenancy is bad for CGT assets. Tenants in common is better

QUESTION: Why don’t you like assets held as joint tenants? As an accountant, I estimate that 80% of my clients own real estate as joint tenants."<yoastmark

ANSWER: Back before 1980, Death and Probate Duties existed. At that time it was popular for couples to hold assets as Joint Tenants. This meant that when one person died the survivor got the real estate, irrespective of what the Will said. The Joint Tenancy property didn’t go into the Will and therefore Probate Duties were avoided on that real estate.

Death and Probate Duties were abolished by 1981 in all Australian jurisdictions. In 1985, the Treasurer, Paul Keating introduced Capital Gains Tax (CGT). CGT works very differently to Death and Probate Duties. For example, the CGT regime doesn’t recognise Joint Tenancy. For the payment of CGT it treats all property as though it was Tenants in Common. If you own property as Tenants in Common (instead of as Joint Tenants) then when you die your interest in the Real Estate doesn’t go to the survivor. It goes into your Estate. This has additional benefits particularly if your Will has been drafted with tax effective 3-Generation Testamentary Trusts.

CGT punishes joint tenancy

From a tax point of view (only) holding any asset in Joint Tenancy is old fashioned and dangerous – this is particularly the case for investment real-estate. It is best to hold all investment real estate as Tenants in Common. We only practice in the area of tax. Accountants and advisers look at more than just your tax position.

It is generally prudent to own investment properties (these are properties that you may rent out, rather than your family home) as Tenants in Common. The cost to sever Joint Tenancy is not normally high. There is generally no CGT or stamp duty consequences.

For most family homes it probably does not matter. This is because most, but not all, family homes are CGT exempt. Check with your Accountant and Adviser.

CGT and Joint Tenancy

For all other real estate, you suffer Capital Gains Tax. Therefore:

1. sever the joint tenancy

2. build a Will containing a 3-Generation Testamentary Trust

3. when you die your half of the property goes into the 3-Generation Testamentary Trust

4. you will pay no or much less CGT when you come to sell that half of the property

If you decide to purchase any real estate in the future then you are welcome to ring me, or any of the solicitors at this firm, to discuss whether your client should purchase that property as Tenants in Common or Joint Tenants.

Challenging your Will

Is someone going to challenge your Will? If so, then you may wish to leave the property as ‘joint tenants’. If you die first the property goes to the survivor. This is automatic. It does not go into your Will. It, therefore, can not be challenged through your Will. See also:

Who can challenge a Will? Fireproof your Will with a Considered Person Clause

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Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJDFamily Trust Deed Family Discretionary Trust
Legal Consolidated Barristers and Solicitors
National Australian law firm

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