This may appear to be a simple question. What is the difference? Why is it important to nominate how you are buying property?
What are the tenancy options:
Tenancy in common (or Tenant in Common): This is an arrangement whereby two or more people co-own the same property, but with no right of survivorship to the other. The portion held under a tenancy in common is “willable” by you to a beneficiary under your will or certain persons where you have not made a will. It is not an automatic right of survivorship to the other “shareholder”. As it is harder to get into the property market in NSW, it is common for family members or friends, to purchase a property together. All of the purchasers can be on title as tenant in common.
You do not have to be equal shareholders under this tenancy. If one party has contributed more to the property, then this can be taken into account such as a 60/40, or 70/30 share. (All shareholdings in the property must add up to 100%). Further, if there is a much greater contribution by a party, then for Estate planning and tax purposes, that higher earner can be noted as a 1% holder. This is common when a husband and wife purchase a property which can be held by them as 1/100% and 99/100%. This depends on the financial risk or threat of bankruptcy by a party. The holding does not have to represent the parties respective contributions, however this is preferable as it makes things easier for the courts to decide if there is a dispute.
Each tenant in common has the right to deal with their share of the property separately from the others. A plus in a tenancy in common is that your shares are protected in the proportion you nominate.
Joint Tenant: This is where the ownership of the same property by two or more people is held jointly and equally – you cannot hold this tenancy in any other capacity other than equally. A joint tenancy carries with it an automatic right of survivorship by law should one tenant die. This is commonly held between spouses.
However, there is a third scenario where more than two parties can hold a property as joint tenants AND as tenant in common. Let me explain.
Party A and B are married and agree to go on title with their daughter and son in law, to help them get their foot in the door in the property market. As the daughter and son in law don’t have enough equity, the parents are helping them. Let us call the daughter and son in law C and D. To secure the interests of all parties, they will all go on title as:
Party A and party B as joint tenants as to a 50% share and party C and Party D as joint tenants to a 50% share as tenants in common.
This means that mum and dad hold the property as joint tenants as to their 50% share and daughter and son in law as to their 50% share. If Party B dies, then his share is passed to Party A, but not to Party C and D. Party A can then nominate their 50% holding in the property to a beneficiary under a will. This is also the case for Party C/D.
The tenancy nominated is recorded on the Real Property Act Transfer which is the document lodged at the NSW Land Titles Office (now called Land & Property Information) and subsequently registered on the new Certificate of Title.
Why do we need to nominate how we hold the property?
There are various reasons for this being:
- Your bank will need to know how you hold the property should there be a default by a party. If the property is held as tenant in common, the bank can only claim that portion of the defaulting party, not all of the parties.
- If one party dies, a Notice of Death is to be completed and lodged at the Land & Property Information. If you hold a mortgage over a property it is a much simpler process to obtain production of the Certificate of Title by the bank to have the property transferred to the surviving person. If the property is held as tenants in common, and each party holds a mortgage with different banks, and one party has died and willed their share to a “new” person, this can be a complicated and lengthy process to have the “new” person entered on title.
- The Office of State Revenue (Land Tax Division) needs to know how you hold a property. If you already own a property as a joint tenant (i.e. 50% share) and you own other properties as joint tenant in whatever share, you may be liable to pay land tax duty to the Office of State Revenue. Your principal place of residence is exempt from land tax, unless the property value is over $3M. (This is classed as premium property by the OSR).
- If your holding of the property is clear, and you leave a valid will, then the distribution of the property (either by way of a transfer to beneficiaries or sale) is easily achieved as there is no ambiguity.
Severance of Joint Tenancy
You can sever a joint tenancy by completing a Real Property Act form and lodging this with the Land and Property Information. This must be signed by both owners. This is a common scenario when the financial stake of one party may increase or in a breakdown of a relationship.
The type of ownership determines the right of the parties to sell their interest in the property, to will the property to their devisees or to sever their joint ownership of the property.
How you buy a property is not limited to the purchase of residential property, but also applies across the board to commercial property, industrial property, etc.
At Taylor and Scott we can help you determine how you wish to hold the property and factor in your estate planning requirements when you purchase a property.