There are a number of reasons why someone would want to split equity in a property. Perhaps a homeowner wishes to leave the property as inheritance, or maybe they wish to split the ownership of an investment property. There are different methods of splitting equity to suit different purposes. Here are some possibilities to consider.
If you hold title with someone else as joint tenants, this means each of you has a right of survivorship. If any individual owner dies, the surviving joint tenants immediately split the deceased person’s equity equally amongst themselves. The surviving owners must register a survivorship application on title to update the ownership, but there is no need to probate (a procedure to give a person the authority to act as the trustee of an estate) the deceased person’s last will or pay any taxes.
This is typically the best choice for married or common-law couples who plan to leave their equity in the home to their spouse upon their deaths. It eliminates the need to apply for probate or pay the estate administration tax before title can be transferred.
This option is not ideal for business partners with dependants, since ownership is not preserved in the deceased person’s estate, and the beneficiaries of the estate do not benefit.
Some additional things to note:
A joint tenancy is always an equal division between the parties - you cannot split a property 70/30 as joint tenants, or 80/10/10.
You can always sever a joint tenancy - meaning you can change the ownership to tenancy-in-common - and you do not require the consent of the co-owners to do so.
A tenancy-in-common allows multiple owners to split equity into whatever shares they choose - 50/50, or 80/20, or 99/1 - and allows deceased owners to retain their ownership in their estate for the benefit of their heirs.
It is important to note that owning a property as a tenant-in-common typically means you should prepare a last will and testament to designate the beneficiary of your property, and your estate will likely have to pay tax on the value of your share.
If your intent is to leave your share of the property to your co-owner, you should certainly consider joint tenancy instead. Tenancy-in-common is more appropriate for people who are entering a common business venture, for people who want their ownership shares to reflect the differences in their contributions to the purchase price, or for couples who want to maintain financial independence from one another.
An additional thing to note:
Tenancy-in-common can be used to minimize capital gains taxes where one co-owner does not occupy the property as a principal residence. For example, a first-time homebuyer may require a parent to join them on title in order to qualify for a mortgage. The child, who occupies the property, can hold title as a 99% owner, and the parent can hold title as a 1% owner. When the time comes to sell the property, the child would be exempt from capital gains tax, while the parent would be responsible for capital gains tax on only 1% of the value of the property.
Mixing Joint Tenancy with Tenancy-In-Common
You can also mix joint tenancy with tenancy-in-common under certain circumstances. Consider a scenario where two married couples purchase an investment property together. There are four owners on title, but each spouse intends to leave their equity to their partner in the event of death. Couple A and Couple B would be tenants-in-common in relation to one another, but the individual spouses within each couple would be joint tenants in relation to one another.
Another option for multiple owners would be to establish a corporation as a holding company for the property, and provide shares in the company to each of the investors. This might be the best choice for a purchase transaction where there are a lot of individual investors who may want to exit the investment at different times. Instead of transferring ownership on title, which requires registration costs and lawyer involvement every time, the investors can transfer ownership of shares in the company, which can be handled between the investors personally. Corporate ownership can also be used to insulate the individual investors from liability concerns.
In some circumstances, the person who appears on title for a property is only acting as a trustee for the actual beneficial owner. This might be for privacy reasons, or because the beneficial owner cannot qualify as a borrower on a loan. A trusteeship must be disclosed to the government, but it does not have to be disclosed on title, so the beneficial owner’s involvement would not be known to the public.
Splitting equity on a property can be an effective way to deliver inheritance in a convenient way, or ensure someone gets their fair share of the asset. Doormat was created to make these types of processes easier for everyone involved. If you bought a property and need help closing, or wish to split equity on a currently owned property, get in touch with us to make it happen!