In an earlier article we posted entitled “What’s in a Name? (Part 1),” we set forth the various possible ways that assets can be titled. Titling controls how an asset that you own will be distributed upon your death. If you own an asset in your individual name, this asset will most likely be distributed through the terms of your Will through the court process called probate, or if you die without a Will, through the process known as administration. If you own an asset that permits you to designate a beneficiary, such as a retirement account, that designation controls who will receive this asset when you die. If you own an asset with a co-owner, the form of ownership and the state where such ownership occurs will dictate to whom and how the asset will be distributed upon your death. This article will focus on the latter form of ownership, joint tenancy and real property you “co-own,” and examine the tax and other consequences that can arise from such co-ownership.
What Is It?
In this article, joint ownership includes a right of survivorship. In most states, that means when you die, the surviving co-owner becomes the sole owner of the property automatically by operation of law. In some states, if real property is co-owned by a husband and wife, such as New York and Florida, such property is deemed to have a right of survivorship, with no special language required. In other states, such as Georgia, property must be titled in the name of the co-owners and indicate a right of survivorship, such as “joint tenants with right of survivorship.” In California, title held as “joint tenants” includes a right of survivorship without any added language.
Why Do It?
Joint ownership is tempting because it assures that an asset you own will be received by the beneficiary of your choice and also assures that this transfer will not require court involvement. However, depending on the asset and the state where the asset is located, avoiding probate may not be a good enough reason to incur the potential negative outcomes of joint ownership. And avoiding probate may have consequences you didn’t anticipate. If you and your spouse wish for the first deceased spouse’s property to be held in a trust for the surviving spouse, property that is held as joint tenants with right of survivorship will bypass that trust and all the protections built into trusts. We will focus this discussion on joint tenancy with limited reference to the concepts of tenants by the entirety and community property.
Except as discussed below for tenancy by the entirety, if you have named someone as a joint owner of your property, you have potentially placed a liability on this property. In other words, should this new “owner” later have an issue with a creditor or be named in a lawsuit, this asset could now be reachable by the creditor. Your intent behind making the transfer of an interest in your property is no defense to the fact that the property is now characterized as a jointly-owned asset. Most likely, you never contemplated this result before making the transfer.
It’s Mine, Not Yours, or Is it?
Alternatively, if you name another person or multiple people as joint owners on title, the act of adding their names is actually the same as making a gift of an interest in real property. Gifting property carries with it further complications. To begin with, depending on the value of the interest “gifted,” you may be required to file a federal gift tax return if the value is greater than a statutorily determined amount, which is referred to as the gift tax annual exclusion amount and is currently $15,000. The relevance of making a gift or making multiple gifts during your lifetime is that you are only permitted to transfer property up to a certain value, whether it occurs during your lifetime and/or after your death, before either gift or estate taxes are owed. This value, called the applicable exclusion amount, is currently $11.58 million, but it has fluctuated tremendously in the past decade and in 2026 will revert back to the 2017 exclusion amount plus inflation adjustments. However, gifts that fall under the annual exclusion amount can be beneficial for you since these gifts reduce the value of your gross estate, which is a factor in determining whether federal estate taxes are owed upon your death.
What Do You Mean OTHER Taxes?
Finally, once you make a gift of an interest in your property, a final issue remains. If your joint owner survives you, part or all of the property may be subject to estate tax at your death. The applicable exclusion amount, described above, could reduce or eliminate any tax, depending on the value of your assets. If your joint owner sells the property, there may also be taxes owed on the sale. This tax is not a gift tax or an estate tax, but rather a capital gains tax. The tax is on the difference between the sale price and the “tax basis.” The tax basis of assets passing at death is usually adjusted to the fair market value at the date of death (a “step up” in basis if the assets have appreciated in value). Such assets can be sold with little or no capital gains tax. On the other hand, if an owner of property makes a gift of an interest in the property during his or her lifetime, the owner’s tax basis in the gifted interest “carries over” to the recipient. This basis is usually the price the owner paid when he or she purchased the property, plus the cost of any improvements. Determining the tax basis for joint tenancy property can be complicated. At the original owner’s death, there is a “step up” in basis for the portion subject to estate tax. If, however, the property produces income, the new basis is reduced by any income tax deductions that the surviving owner may have taken for depreciation.
One important exception to this rule has to do with the joint tenancy that some states permit. In states such as California, married couples who own property together during their marriage can take title to this property as community property with right of survivorship. Such property will automatically pass to the surviving spouse, and will also receive a new value when the second spouse dies, thereby eliminating capital gains taxes if the asset is sold shortly after the second spouse’s death.
A Special Form of Joint Ownership
Another form of joint ownership is called tenants by the entirety (“TBE”). This form of joint ownership can occur only where the owners are a married couple and the asset owned is real property, and in New York, a cooperative apartment. The advantage of TBE property is that it is not available to the creditors of only one spouse, and therefore the owners get some creditor protection that joint tenants do not. Only certain jurisdictions, such as New York and Florida, permit this type of ownership.
There are a panoply of potential tax and non-tax pitfalls that need to be analyzed by your tax professional. In addition to these issues, citizenship and residency must also be considered. Therefore, it is advisable that you speak with your tax advisor to determine if you have one or more of these tax issues.