Joint Tenants with Right of Survivorship in Arizona
Lonergan v. Strom – How you deed your marital residence matters.
Key Terms to Know When Talking About Deeds
Joint Tenancy with Right of Survivorship (JTWROS): The ability to own assets jointly, if there are two or more individuals who have rights to the assets. It essentially permits two or more individuals to own the property as though they were one individual. Graham v. Allen, 11 Ariz. App. 207, 208 (1970). The right of survivorship refers to what happens when one of the owners dies. The last surviving owner gets the whole interest in the property.
Joint Tenants: Coinciding interest for two or more individuals that have holdings in personal, intellectual or real property. This essentially allows two or more individuals to own the property as though they were one individual. Graham v. Allen, 11 Ariz. App. 207, 208 (1970). Though joint tenancy is technically separate property, under A.R.S. 25-318(A), it is treated as though it is community property in divorce proceedings. Toth v. Toth, 190 Ariz. 218, 220 (1997).
Warranty Deed: A legal document that authenticates the sale, ownership, or transfer of real estate from a grantor (generally, a seller) to a grantee (generally, a buyer). The grantor essentially guarantees that they have the right to convey the deed.
Disclaimer Deed: A legal document that once signed at the time of purchase by a party waiving all interest to real property current or future. This is commonly signed in a marriage when the parties buy or refinance a home and take the loan out in just one spouse’s name because the other spouse has good credit. In those instances, the lending company typically has the other spouse sign a disclaimer deed giving up their interest in the house.
Quit Claim Deed: Similar to a disclaimer deed, but signing is not done at the time of purchase or refinancing. A person signing a quit claim deed gives up all their interest in a property and assigns it to another person. It’s a common way to transfer property from one spouse to another upon divorce.
Probate: A legal process that determines what happens with a person’s property upon death.
Holding or Interest (in a property): This simply means you have a right to the real property, either by security or ownership.
Joint Tenancy and the “Four Unities”
Some couples choose to deed their home as joint tenants with right of survivorship as a way to avoid probate. When one spouse (or joint tenant) dies, the property automatically passes to the other spouse.
To have a joint tenancy, the law requires there must be “four unities” to meet the threshold of joint tenants– interest, possession, time, and title. This means each spouse must have an equal share in the property, an equal right to possess it, they must both be on the title, and their interests in the property must vest at the same time. If these four unities ever cease to exist, the joint tenancy is dissolved, the parties hold the property as tenants in common, and the right of survivorship ceases to exist.
How it Can Impact the Division of Property
One famous Arizona case, Lonergan v. Strom, 145 Ariz. 195 (1985), demonstrates how Joint Tenants with Rights of Survivorship can impact the division of property in Arizona courts. Husband and Wife purchased a home as joint tenants with right of survivorship. Later, Husband met with an attorney, who convinced him it was in his best interest to sever the joint tenancy. To dissolve the joint tenancy, Husband signed a quitclaim deed to assign his share of the house to the attorney’s Secretary. In turn, the Secretary executed a quitclaim deed, reassigning it back to Husband. This series of events successfully dissolved the joint tenancy because the deed transfer to the Secretary meant that Husband and Wife did not continuously have equal ownership of the house. Even though it was only for a short amount of time, the transfer meant that the four entities did not exist. (We do not recommend doing this!) Thereafter, their marriage was annulled, and Husband died. Wife sued claiming that the Right of Survivorship entitled her to Husband’s share of the home. She argued the property would have been hers except for this shady deed transfer. But the Court of Appeals upheld the quit claim deeds as a valid transfer of interest that ended the joint tenancy. It shows how easily a joint tenancy with right of survivorship can be severed.
Disadvantages of Joint Tenancy
The disadvantage to a joint tenancy comes in the form of taxes. To understand this, we have to discuss the concept of basis. Basis is a tax term and refers to the value of an asset at the time it is acquired. When the asset is sold, you subtract the basis from the sale price to determine the loss or gain. Gains, of course, are taxable income. As an example, if you buy a piece of art for $500, your basis is $500. When you sell it ten years later, you subtract the basis from the sale price. If you sell it for $300, then subtracting the basis from the sale price, we see you have lost $200 and you can report that loss on your taxes and it may lower your tax burden. If you sell it for $1,000, when we subtract your basis from the sale price, you have a $500 gain, and you will have to pay taxes on that gain.
When property is held as community property and a spouse dies, basis for the property for both spouses’ interest in the property is the fair market value of the property at the time of the spouse’s death but only if one half of that property is included in the estate of the spouse who died. See 26 U.S. Code § 1014(b)(6); see also IRS Publication 555 on Community Property, pg. 9.
But with joint tenancy property with right of survivorship, the surviving tenant acquires the other half of the property when the other tenant dies. In that case, the basis for the surviving tenant’s original share remains half of the original sales price. The basis for the share the surviving tenant received is the fair market value of that half at the time of the other tenant’s death.
Hypothetical of JTWROS
Here is a hypothetical to help demonstrate how this works. Ashley and Braxton, a married couple, purchase a home as joint tenants with right of survivorship for $200,000. At the time of Braxton’s death, his half of the property automatically transferred to Ashley. When he died, the home was worth $400,000. Ashley later sold it for $600,000. What is Ashley’s basis? Because Braxton and Ashley acquired the property as joint tenants with right of survivorship, her basis is her half of the original $200,000 purchase price, $100,000 plus the fair market value of the other half at Braxton’s death, $200,000 for a total of $300,000. With a final sale price of $600,000.00, Ashley has a taxable gain of $300,000.00.
However, if they had held the property as community property with right of survivorship, both Ashley’s original share and the share she received from Braxton would be valued by the fair market value at the time of Braxton’s death (i.e., each half was worth $200,000.00). Ashley’s new basis is $400,000.00. When she later sells the house for $600,000.00, she has a $200,000 taxable gain.
So, what can a couple do if they want to avoid probate and save money on taxes? Well, in 1995, the Arizona Legislature came up with a solution. It created community property with right of survivorship. It has the advantage of avoiding probate that joint tenancy has and the tax benefit of a step-up in basis that community property has.
*2 important things to note
- Step-up in basis applies to a multitude of investments, not just real property.
- As of this writing, the future of the step-up in basis is uncertain. There is legislation pending that challenges the law. If it ends up being eliminated, so does the advantage of holding property as community property with right of survivorship.