Two or more property owners can hold title to jointly held real estate in several different ways. Traditional methods include tenant in common and joint tenancy. A handful of states, however, recognize the legal concept of community property.
In this blog we’ll discuss some of the primary differences between tenancy in common (TIC) and community property ownership since the manner in which title is vested has important legal and taxation ramifications for property owners.
What Is a Tenancy in Common?
Tenant in common is a frequently used ownership structure where two or more individuals hold fractional shares of real estate, such as a home, condominium, or townhouse. 1031 exchange investors also use it to purchase fractional shares of multi-unit residential investment properties.
Co-owners can hold unequal shares, and they are free to divest their shares independently of other co-tenants. A key difference between TIC ownership versus another common form of joint property ownership, joint tenancy, is that it does not include the “right of survivorship.” In a joint tenancy, one co-owner’s shares are automatically passed on to the other owner upon death. In a TIC, however, co-owners can bequeath their fractional interests to an heir of their choosing.
What Is Community Property?
Nine states have community property laws: Wisconsin, Louisiana, Texas, New Mexico, Arizona, California, Nevada, Idaho, and Washington. Community property laws only apply to married couples except for in three states -- Washington, Nevada, and California -- which also recognize domestic partnerships.
Under community property laws, substantial assets acquired during marriage -- including single-family homes and similar residential properties -- are viewed as community assets equally owned by co-tenants. It doesn’t matter if one spouse is the primary breadwinner while the other is a homemaker raising children -- both spouses claim equal ownership to marital assets. However, any assets acquired before the marriage are exempt from these rules regarding equitable ownership.
Community property law allows you and your spouse to bequeath ownership interests as you desire. Community property with rights of survivorship, however, stipulates that the surviving spouse receives the deceased spouse’s share of marital assets -- you can’t will your share of the home or townhouse to your children.
The Bottom Line
If you live in one of the nine states that have community property laws, it’s important to fully understand the legal and financial implications of this legislation since it impacts your ability to distribute marital assets in the event of divorce or death of a spouse.
Community property is restricted to married couples and to domestic partners in a few states. Additionally, certain jurisdictions allow married couples to hold title to real estate as community property with right of survivorship, which changes the legal landscape completely. Discussing these methods of property ownership with legal and financial professionals can help ensure you distribute your estate according to your wishes.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.