So many people own assets as “co-tenants”. However, co-renting can cause more headaches than you realize!
With such a strong focus on home ownership, we should take a moment to discuss the issue of legal ownership. Most people have legal title to their house in a joint lease – two or more people own the house together as “joint tenants”.
Legally, that means when one person dies, all of the deceased owner’s interest in the property is immediately transferred to the living owner. Therefore, if John and Mary own the property in a joint lease, and John dies, then Mary owns the entire property directly. While certainly a convenient method of ownership, there may be some unexpected costs.
Here are some things to think about when it comes to having assets (such as your home) in a co-lease:
Some couples are married and others see Joint Tenancy having a will evasion tool. After all, if they had common property, there was no need to go to court if someone died. Co-renting with your spouse can avoid probate on the first death, but not on the second death. You are not “avoiding” the probate but simply “delaying” it. This can expose your family to thousands of dollars in unnecessary court costs, not to mention the time it takes for assets to pass through the court system. Sure you could keep adding co-tenants, but there could be unfortunate tax consequences, not to mention family squabbles.
Co-renting doesn’t mean you have to avoid probate courts. While you may avoid probate for certain items of property, you can still end up with a will with respect to other items. In other words, you still end up in probate court which is exactly what you were trying to avoid in the first place. Once in the probate court, the judge may order that all assets be kept and/or not sold until all issues are resolved.
You may also have less control over the property if it is held in a joint lease. After you die, you really have no right to determine what happens to the property. Property owned by the surviving co-tenant will pass to the heirs of that tenant, who may not be valued by the deceased’s relatives. This sometimes leads to “accidental seizure of inheritance”.
Accidental Release of Inheritance: In this author’s estimation, this is the scariest outcome of a co-lease. For example, let’s say Mary and John own $850,000 worth of prime Los Angeles real estate in co-leases (as many people do). They had no children, and they had not prepared a will. One day, Mary died in a car accident. The property then became wholly John’s as the surviving co-tenant. So far so good.
However, John died a year later. The property then went to John’s mother who inherited it under California law. Mary’s family was out of luck. They received $0 of the $850,000 home. You see, co-lease trumps even if the will says otherwise. It’s even worse if the surviving spouse finds a “new love”. What if John marries the beautiful “Suzy” after Mary’s death and places Suzy as a tenant with him? In this case, if John dies, Suzy gets everything. Both Mary’s and John’s were less fortunate (which could be even more problematic if John and Mary had children). Don’t let “Suzy” do this to your family! Remember, with co-leases, the “last person standing” gets the property directly… and they may not want to share.
Some people put their adult children on title with them as co-tenants. The logic of the parents is that by doing so, they allow the house to be given to their children more easily after the death of the parents. However, having assets with adult children is usually a bad idea. Why? First, if there is a difference of opinion about the property, it can lead to real disputes between parents and children. Second, co-renting can also lead to unwanted beneficiaries, such as child creditors or a divorced spouse who suddenly has an interest in your home! Placing adult children on a degree may be considered a gift by the Internal Revenue Service which may have taxable consequences.
Whenever you add someone’s name to an asset, you’re effectively adding a “target eye” to that asset. If you own a property in a joint lease, you may be exposing the asset to a creditor’s claim. They don’t even have to be your creditors. If one co-tenant gets into trouble, the entire property could be in jeopardy. Why would you want to expose your home or bank account to additional potential liability?
Also, placing an adult child on a real estate title as a co-tenant can lead to major capital gains tax issues. For example, let’s say your parents bought their house in 1968 for $50,000. Now worth $600,000. If your parents put you on the title, you then absorb your parent’s cost base which can mean big tax consequences when you come to selling the property. You must pay taxes on profits of $550,000.
If your parent’s property is held in a living trust, you can inherit the property and sell it immediately after, generally without tax consequences because you’ll get an increase in fees. In the example above, you’d get the house through a $600,000 inheritance. You sell it the following week for $600,000 and there’s no tax to pay because there’s no “profit.” Even if a married couple has their residence in a joint lease, it is likely that more capital gains tax will have to be paid on the sale than necessary because only half of the properties receive a new cost base upon the death of one of the spouses.
Shared rentals can also lead to family disputes. All owners may disagree about what to do with a piece of property. For example, let’s say three siblings own the property as joint tenants. Two children may want to sell a property because they need the money or are tired of paying property taxes. The remaining children don’t want to sell. In fact, he wants to live in the house forever and have siblings who share property taxes and other maintenance costs. This happens more often than you think, and the kids end up in court. Shared rentals are also difficult to change. Also, once you add a co-tenant to your property, you can’t simply remove it from the title. They have to agree to it, which can also lead to unnecessary disputes.
Therefore, owning the property in co-lease may be an easy solution at first. However, it may prove to be a poor choice in the long run.
Consult an estate planning attorney to see if a co-lease is right for you, or if some other form of ownership might be more profitable. You may have to think a few steps ahead, but that’s what planning is all about.
Please forward this email to friends, colleagues and family who may find it helpful.
