Investing in Tenancy in Common

Tenancy in Common is joint ownership of property where property ownership does not pass to other joint tenants in the event of death unless specifically stated through legal documentation. Joint tenancy in common is not the same as joint tenancy which is subject to 'rights of survivorship' by the other joint tenant(s) regardless of willed property.

Joint tenancy in common ownership can be subject to more extensive legal stipulations than more rudimentary forms of ownership. Taxation of property held in joint tenancy in common may also be regulated by different tax codes depending on the type of property.. Two typical examples of joint tenancy in common are illustrated below:

• Joint Tenancy of Real Estate: When two or more people have joint tenancy of a property they may both own a percentage share of the asset value of the home but not a distinct portion of the physical property.

• Liquid Capital Joint Tenancy: Unlike joint tenancy in housing, joint tenancy of liquid assets such as stock investments is not always subject to the same requirements. In this case joint tenancy may only imply joint ownership with no distinction of how much of the asset each owner owns.

Joint tenancy is subject to various benefits and disadvantages that are not typical of other types of asset ownership. These factors are ideally considered before entering joint tenancy contract(s) and are illustrated as follows:

Benefits of Tenancy in Common:

• Tax advantages: Joint tenancy in common has post-mortum tax advantages. That is, if one is planning from after (s)he dies, there can be an increase in the applicable property deductions an inheritor of the property is able to utilize. More deductions usually mean lower taxation.

• Leveraged Investment: Since joint tenancy is not full ownership it does not require the same amount of financing. This can allow one to become ownership in multiple properties, in affect leveraging the money one would have used for one home for ownership in several homes.

• Financing: Obtaining mortgages for joint tenancy may be easier due to the smaller amount of capital required. This can make home ownership a more realizable goal for those with less capital.

Disadvantages of Tenancy in Common

• Beneficiaries: Unlike in joint tenancy, joint tenancy in common may pass property onto heirs, beneficiaries or family members as with traditional ownership. While this may be an advantage to those stated in a will, it may be a disadvantage to other joint tenants who's interest do not match that of the new owner.

• Complication: Since joint tenancy may involve many owners, the rules of ownership can become complex as each owners interest must be represented and adhered to within the parameters of the contract.

• Financial Risk: If one owner in the joint tenancy experiences financial difficulties requiring a financial institution to seize assets or foreclose property this could adversely affect other joint tenants. This applies to joint ownership of both home property and liquid assets.

Items to Consider Before Joint Tenancy in Common

Joint tenancy is a form of asset ownership that requires certain prerequisites to ensure a financially stable ownership. Generally, this type of ownership should meet the following pre-conditions:

• Mutual Trust: Joint tenants ideally trust each other as they are more or less business partners.

• Financial Stability: Each partner in the joint tenancy will likely be more stable joint tenants if their financial situation is strong to begin with.

• Contract Specifications: To prevent future problems and complications, the tenants should have at least a verbal agreement as to how the property will managed and utilized. A written contract is preferable and more legally binding.

• Team Work: The larger the pool of tenants in the agreement, the more amount of cooperation and understanding may be needed. The ability to perform as a team could be beneficial in this type of ownership.

When making the decision to become a joint tenant it is important to realize it is not a solo venture and may involve some complex legal caveats and provisos. Knowing as much as possible before entering a contract of joint tenancy in common could be advisable to avoid mis-judgment or faulty ownership intention.

Having sufficient foreknowledge of potential circumstances is especially true in regard to real estate which can involve title issues, easements, mortgage insurance, natural hazards etc. The same freedoms and benefits of sole ownership are not present within a joint tenancy in common ownership. However, once the initial 'disadvantages' of joint tenancy in common are understood, this type of ownership agreement can be a potentially profitable and rewarding venture.

Pros and Cons of Co-Signing for a Home as a Couple

Co-signing on home mortgages can be performed through joint tenancy, joint tenancy in common and sometimes through a business partnership if the couple co-signing are also business owners. The type of agreement and context of the co-signing can influence the potential benefits and disadvantages of co-singing a loan.

• Joint tenancy

In a joint tenancy there are two co-owners, which implies should something adverse happen to one of the owners, the property becomes the responsibility of the survivor, non-imprisoned, financially solvent or benefactor of divorce proceedings.

• Business partnership

Should the couple co-sign the home loan via a business i.e. a second home that is to be used for business or investment purposes, that property may be subject to different regulation and rules. Consequently, the benefits and disadvantages associated with such a loan may also be varied.

• Joint tenancy in common

In the case of Joint Tenancy in common, the terms of ownership are similar to that of joint tenancy however the ownership does not necessarily pass onto the surviving co-owner in the even to death.

Advantages of Co-ownership/Joint Tenancy

Taking into account the above types of co-singing agreements, co-signing a property and property loan brings a handful of benefits that may make the deal worthwhile. A few of those advantages are listed below with reasons why they are useful

• Financial liquidity and default avoidance: If for some reason, one partner should become sick or incapacitated in some way, having a co-owner can help insure the home is not lost in the case of a missed payment or default due to sudden illness or circumstance.

• Upkeep and maintenance: Having more than one owner can assist in the functionality of a home. Homes often have associated duties, tasks and sometimes repairs and multiple owners may allow more time for such responsibility.

• Tax deductions: If the all or part of the home is operated exclusively for business purposes, that part of the home may be subject to mortgage interest and overhead expense tax deductions. In the case of a couple who do not operate a business, mortgage interest payments can be a potential tax benefit as well.

• 'Rights of survivorship': In the event of death, the property and loan automatically become property of the co-owner in joint tenancy, and the property of the beneficiaries in joint tenancy in common. Depending on who and what the circumstances include, this may be an advantage at least in the sense ownership is clarified.

Disadvantages of Co-Ownership/Joint Tenancy

There are unfortunately also potential disadvantages associated with joint ownership of a home. Whether or not these disadvantages outweigh the advantages is a matter of subjectivity and individual feeling.

• Mortgage assumption

In the case of divorce the loan may be 'assumable' meaning that one co-owner may be removed from the loan and/or replaced with another co-owner if possible. This may be a beneficial clause in the mortgage loan, but may be downright unpleasant should the actual need arise.

• Credit rating

When two or more people co-sign on a loan, the payments related to that loan can affect both owners credit history and records. Should only one party be financially responsible or no agreement be made regarding payments on the loan, a default on the loan could damage two credit ratings instead of just one. (This may also be a benefit should the reverse scenario be true.)

• Psycho-financial independence

In the event of financial co-ownership, a degree of financial independence is essentially lost. For some couples, this may present a psychological level of union that is uncomfortable and/or unwanted.

• Dysfunctional business relationship

While a loan that is co-signed may have been approved in good faith, good intention and with financial responsibility in mind, those things may be no match for a dysfunctional business relationship. A dysfunctional relationship can ruin professional agreements, marital agreements and financial agreements without distinction.

Summary

Co-signing loans between couples have a great deal of potential in terms of financial management, taxes, legal matters and property maintenance. Essentially, if the relationship is strong and likely to continue being strong based on all logical measures of such 'strength of union', the decision of couples to co-own property may be prudent.

To the contrary, there are also certain disadvantages that the couple may want to consider regardless of the strength of their relationship. For example, the couple may find psycho-financial independence to be of more importance than fiscal practicality.

Each situation is unique, and thus the above information may be considered supplemental to the individual situations surrounding a couple's financial, personal and possibly business relationship. In other words, the information contained herein, clarifies potential advantages and hazards that may arise should a couple co-sign on a home loan.