Property ownership takes many forms. In real estate investing, it is not uncommon for two or more business partners to explore shared ownership. One form of shared ownership in particular — tenancy in common — can make getting involved in real estate investing more attainable and affordable. This type of ownership has plenty of benefits as well as potential downsides to be aware of.
What Is Tenancy in Common (TIC)?
Tenancy in common (TIC) is when the ownership of a property is shared by two or more parties. The parties can own an equal share of rights in the property or an unequal share, depending on the legal arrangement. The parties who share ownership rights of the property are known as tenants in common.
How Does Tenancy in Common Work?
TIC works by splitting the interests and privileges of a piece of property among two or more parties, known as tenants. These agreements can be created at any time. After an agreement has been made, another party may join the agreement at a later date as well.
Each tenant can hold a different ownership percentage of the property, but none of the tenants in common can claim ownership of a specific part of the property. For example, if a property has three separate single-family homes on it, a tenant cannot claim ownership of one of the homes on the property.
Each tenant in common can sell their portion of ownership independently of the other tenants in common. They can also leave their share of ownership to a beneficiary. If one of the tenants in common dies, their share of ownership will be left to their beneficiary and not to the other tenants. Additionally, the tenants in common can dissolve the agreement by buying out the other members of the TIC.
Pros and Cons of Tenancy in Common
Like any other financial decision or investment, there are pros and cons of tenancy in common that should be taken into consideration.
Pros of TICs
A tenancy in common isn’t going to be the right fit for everyone or every situation, but there are some substantial benefits to this type of agreement. Generally speaking, TICs can make entering into real estate investments more affordable for people. Some of the specific benefits include:
- A tenancy in common agreement can make investing in real estate more achievable for some people.
- The parties involved in a TIC can change over time.
- The shares do not need to be divided equally between tenants.
Cons of TICs
While there are benefits to a TIC, there can be some drawbacks as well. Anytime a TIC is entered into, everyone involved needs to be aware of the liabilities and responsibilities that come along with it. It’s important to consider these factors before entering into any TIC:
- If one of the tenants wants to sell the property, they can push the sale forward even if the tenants don’t all agree.
- All of the tenants involved in the agreement are equally liable for any debts or property tax related to the property, regardless of how the shares of the property are split up.
- A portion of the property ownership can be transferred to a beneficiary if one of the tenants dies instead of going to one of the other tenants in the agreement.
How to Mortgage Your Share of the Property?
Mortgaging a property that is under a TIC agreement has to be done a bit differently than a traditional mortgage. While all of the tenants can get together as co-borrowers on a traditional mortgage, individual tenants can also seek out special mortgage products to finance their portion of ownership alone.
To mortgage your share of the property, you can look into a product called fractional financing or individual TIC financing. This type of financing only covers your share of the property. So if you default on the loan, the lender can foreclose on your share of the property and sell it off. If this happens, none of the other tenants involved in the TIC are held responsible or impacted.
It’s important to note that not all lenders offer individual TIC financing. This type of financing is much less common than traditional mortgages and hasn’t been around for nearly as long. If you’re interested in mortgaging your share of a TIC, you’ll need to search for a bank or lender who participates in this type of financing.
Tax Implications Under Tenancy in Common
The tax implications that come with a TIC are different from typical real estate tax implications that a sole owner would face. Any tenant’s share of a TIC is considered personal property for tax purposes. This means that it is not subject to capital gains taxes.
A TIC divides ownership among the owners, but taxes on the property are not divided. Every tenant who is part of a TIC is legally responsible for the full amount of property tax on the home. Tenants involved in a TIC should make sure to discuss how much each owner will pay toward the property taxes and include this in the written agreement. This information can also help each owner determine what deductions they may be able to claim on their tax returns.
If you mortgage your share of ownership in a TIC, you may also be able to take a tax deduction for mortgage interest. Your mortgage lender should provide you with a copy of Form 1098 that you can use to report your interest paid when you file your taxes.
How to Dissolve Tenancy in Common?
A TIC can be dissolved by one or more of the tenants buying out the other members in a joint agreement. For this to occur, ideally, the tenants will all agree to dissolve the TIC and agree on who will buy the other shares of the property. If an agreement cannot be reached between the tenants, there can be a court-ordered partition action to dissolve the TIC.
If there is a partition proceeding, the court will divide the property into parts that are individually owned and managed by each tenant. No one has to sell their portion of the property against their will, and the tenants may decide to enter into a partition of the property by sale. When this happens, the property is sold and the proceeds of the sale are divided among the tenants based on the share that they held in the property.
Other Forms of Property Ownership
There are other forms of shared property ownership as well. Each form comes with its benefits. In some cases, another form of shared property ownership might be a better option than TIC.
Joint Tenancy
Joint tenancy is when tenants hold equal shares of a property with the same deed and enter into ownership at the same time. With this type of ownership, if one of the joint tenants wants to buy out the other tenant’s shares, the property must be sold with the proceeds equally distributed between the tenants. Another difference between joint tenancy and TIC is that if one of the tenants dies, the surviving tenant receives their share of ownership.
Tenancy by Entirety
Tenancy by entirety is a form of shared ownership that only applies to married couples. The parties must be married at the time that they purchase or otherwise become the owners of the property. Some states might also allow tenancy by entirety to be held by common-law spouses or domestic partners.
With this type of ownership, each spouse has an equal and undivided interest in the property. Neither spouse/owner has the legal right to sell or make other major changes to the property without the other spouse’s consent. The main benefit of this type of property ownership is that it is designed to protect the interests of each spouse. If one of the spouses dies, the surviving spouse automatically receives their interest in the property without the need for a survivorship clause.
Tenancy in Severalty
Tenancy in severalty is a fancy real estate term that essentially means that the property has one owner. The sole owner of the property in this type of ownership has the right to do anything that they’d like with the property, including selling it, leasing it and giving it away to someone else.
Who Should Consider Tenancy in Common?
Tenancy in common can be a good option for people who want to invest in a property alongside other parties. In most cases, tenancy in common wouldn’t be the ideal type of ownership if you are planning to make the property in question your main residence. Regardless of your situation, it’s always wise to understand your options and know that tenancy in common can be pursued.
Frequently Asked Questions
Can I sell my share of the property without the consent of the other owners?
Yes, as part of a TIC, you can sell your share of the property without the consent of the other owners. It’s a good idea to consult with a real estate attorney if you want to go this route.
How are property expenses and maintenance costs divided among the owners?
The owners of a TIC need to decide among themselves how the property expenses and maintenance costs will be divided.
What happens when one of the tenants in common dies?
If one of the tenants in a TIC dies, their share of the property is passed to their estate. The other owners are not entitled to the property unless the deceased tenant leaves one of the other owners as their beneficiary.