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Joint Tenancy

One of the most important decisions that you can make when buying a home is how you take title in the property. If you're unmarried, your choices are simpler because you take title as a sole owner. When two or more people co-own a property, however, the number of ways to take title multiplies dramatically. Each form of co-ownership has its own advantages, disadvantages, tax consequences, and legal repercussions.

Here are some forms of co-ownership and the advantages of each type:

Joint tenancy

Suppose, for example, that you and your spouse buy a house together as joint tenants. When your spouse dies 20 years from now, ownership of the house automatically transfers to you without going through probate. This feature of joint tenancy co-ownership is known as the right of survivorship.

There are also tax benefits. You also get a stepped-up basis on your spouse's half of the house. When you sell the house, this may save you big bucks on the capital gains tax. Here's an example.

Community property

Only married couples can take title as community property. Compared to joint tenancy, an advantage of community property co-ownership is that both halves of your house get a stepped-up basis upon the death of your spouse. This gives you even bigger tax savings.

Using the same figures as the joint tenancy example, as the surviving spouse, your cost basis is the full $300,000. Capital gains tax is forgiven on every penny of appreciation in value between the date of purchase and time your spouse died. Another advantage of community property co-ownership is the ability to will your share of the house to whomever you wish. Due to the right of survivorship, this choice isn't possible when title is held as joint tenants.

Tenants-in-common or partnerships

Holding title as tenants-in-common or in the form of a partnership doesn't give you a stepped-up basis upon the death of a co-owner. This creates an obvious disadvantage from a tax standpoint.

Offsetting legal advantages exist, however, for unrelated persons who take title either as tenants-in-common or as a partnership. Under these forms of co-ownership, you generally have the right to will or sell your share of the property without permission of the co-owners. Furthermore, co-owners don't have to have equal ownership interests in the property -- a nice feature for people who just want a small piece of the action.