Reed: Joint tenancy can create complications

Sandra W. Reed
Special to the Reporter

Brothers Tom, Dick and Harry own a ranch together, holding title as joint tenants with right of survivorship (JTROS).

Tom lives on the property and pays the mortgage. The three of them split the payment of taxes and insurance equally. Tom and Dick work the farm together and share the income and expenses. Harry takes no income and pays no expenses of the ranch operation, using the property occasionally for recreational purposes. What are the consequences of this arrangement?

Sandra Reed

What happens when one of the joint tenants dies

When one of the joint tenants dies, the property is automatically inherited by the surviving tenants. So, if Tom dies first, Dick and Harry will own it in equal shares. Since Tom pays the mortgage, the entire property will be treated as being in Tom’s estate. The basis in the property for the surviving joint tenants will be increased from the cost of purchase and improvements to the fair market value at Tom’s death.

Thus, thereafter, Dick and Harry’s basis in the property will be one-half of that stepped-up basis. If all three joint tenants had contributed equally to the purchase of the property, and could prove that to the IRS, one-third of the property would be included in each estate with a stepped-up basis on that portion at death.

Gift taxes

Joint tenants are equally responsible for paying the expenses associated with the property, including the taxes, insurance and mortgage. Since Tom pays the mortgage payment, he is charged with having gifted to Dick and Harry their share of the mortgage expense. If that amount is more than the $15,000 gift tax exclusion, he will have to file a gift tax return each year that arrangement continues.

Income taxes

Each tenant includes an equal share of income and deductions on their individual tax returns under general JTROS rules. However, Tom, Dick and Harry’s situation is complicated by Tom’s living on the property, paying the mortgage, and sharing income and expenses of the ranch operation with only one joint tenant. They should consult a CPA with knowledge of tax law to determine how to report the income and expenses to comply with tax law under the Internal Revenue Code.

Sandra W. Reed practices Elder Law in Somervell County, handling probating of estates, drafting of wills, trusts, powers of attorney and deeds as well as estate and Medicaid planning.  She lives on beautiful Chalk Mountain and can be reached at 254.797.0211; 817.946.2809 or at sreed@kbzlaw.com.