Joint tenancy or percentage interest?

January 26, 2006 9:37 AM

I'm refinancing investment property with my fiancé. The deed is currently 100% in my name, and the bank wants her name to go on the deed before loaning the money. We have a choice of Joint Tenancy or specifying a percentage interest. What are the advantages and disadvantages of each choice?
posted by letitrain to Work & Money (8 answers total)

Go find a financial planner who knows about this stuff. There are a few potential potholes. For instance, if your fiancee suddenly owns half the property, the IRS could view it as a gift and tax you. (If you wait until you're married this shouldn't be a proble.) Actually a whole lot of your answers will different depending on your marital status.
posted by small_ruminant at 9:45 AM on January 26, 2006

Yeah, the more searching I'm doing, the more I think I need a financial planner's help.
posted by letitrain at 9:56 AM on January 26, 2006

IANAL, but I can at least explain the differences. Joint tenancy means that you both simultaneously own 100% of the property. If one of you dies, the property isn't "inherited" or passed through an estate, since the other person already owns the "whole" property. This can be a benefit down the road, since it avoids estate taxes, probate fees, and whatever other things the government wants to get from you. The main downside is that if you and your fiancé break up, you need to get the deed modified to reflect who will own the property afterward.

If you specify percentage interest, then each of your wills can specify what is to happen to each share of the property - it could be bequeathed to your fiancé, given to charity, or whatever. On death, the share of the property becomes part of the estate and can result in higher probate fees and estate taxes.

This is something that should be discussed with either a lawyer or a financial planner, because there are consequences to both choices that you might not have thought about.
posted by gwenzel at 10:26 AM on January 26, 2006

Or a real estate attorney who knows about tax consequences.
posted by WestCoaster at 10:37 AM on January 26, 2006

One of my biggest concerns is tax: it's a California property that was purchased using a parent-child exclusion, meaning it wasn't re-assessed for tax. If I grant deed a portion to my fiancé, I'm afraid her portion will be re-assessed.
posted by letitrain at 11:10 AM on January 26, 2006

Gwenzel is kind of right, but not entirely.

First off, a "deed" is a method of transferring title from one person to another. Currently, the title is in your name. The bank wants the title to be in both people's names, which would be accomplished by you executing a deed from you (alone) to you and your fiance as either joint tenants or tenants in common (what you call "percentage interest").

Under either type of ownership, you both have complete access to the property. If you rent it out for income, you can split the rent however you agree to do so. After you are married, the income will be attributed equally to you both, because California is a "community property" state.

Let's say Tenant A owns 60% of the property, and Tenant B owns 40%. Under joint tenancy: Tenant A dies, Tenant B owns 100% automatically. Under tenancy in common: Tenant A dies, Tenant A's estate gets A's 60%, Tenant B still owns 40%. If you don't want your co-owner to own the entire property upon your death, you don't want joint tenancy. Either joint tenant can convert a joint tenancy into a tenancy in common without the knowledge or consent of the other tenant.

However, since you are marrying this other person, you might want to consider waiting until after the marriage to do this. I don't know if California has this, but some states allow property to be owned as a "tenancy by the entirety" for married couples. This form of ownership is very similar to joint tenancy, except that a tenancy by the entirety cannot be converted into a tenancy in common without both tenant's consent. It also may have other advantages.

These are just the basic concepts. I don't know anything about California law, I'm not a California attorney, and I'm definitely not your attorney. You need to consult an attorney of your own, not the bank's attorney. Don't be put off by the cost, either. You both should probably also write a will, and write a living will, after you get married anyway. On the off chance you have kids, it is the responsible thing to do.

Confused? You should be. I'm in my third year of law school, and it's hard enough for me to handle it all. Pay a professional, or you could end up paying even more in the long run.
posted by MrZero at 1:03 PM on January 26, 2006

Thanks MrZero and everyone else. I'm looking for a financial planner now.
posted by letitrain at 2:01 PM on January 26, 2006

Just to follow up:

I spoke with a tax accountant that specializes in real estate, and I got a much better understanding of the issues and choices. With my concerns about reassessment, he suggested joint tenancy, since no value is changing hands. I am still the 100% owner, I'm just adding a tenant. This was double-checked with the assessor.

Had I gone with tenancy in common with a percentage split, I would be giving a portion of the property away, hence something of value and a reassessment.

Of course, those rules apply only to this particular county and state, so definitely check it out yourself. Thanks again everyone!
posted by letitrain at 3:58 PM on February 1, 2006