Tenancy in Common

What is Tenancy in Common (TIC)?

Tenancy in Common (TIC) is a popular form of co-ownership in real estate where two or more parties hold individual, undivided interests in a property. This means that while each owner has a distinct share, they all have the right to possess and use the entire property. A key characteristic of TIC is that the ownership shares do not have to be equal; one owner might hold a 60% interest, while another holds 40%. This flexibility makes TIC an attractive option for various real estate investment scenarios, particularly when multiple investors pool resources to acquire a property.

Unlike other forms of co-ownership, such as Joint Tenancy, TIC does not include the right of survivorship. This is a critical distinction for investors. When a tenant in common passes away, their interest in the property does not automatically transfer to the surviving co-owners. Instead, their share becomes part of their estate and is passed on to their designated heirs or beneficiaries according to their will or state intestacy laws. This feature provides greater control over estate planning for each individual owner.

How Tenancy in Common Works

In a Tenancy in Common arrangement, each co-owner holds a separate legal title to their specific percentage of ownership. While the physical property itself is not divided, the ownership interest is. This allows for significant flexibility in how investors structure their deals and manage their assets.

Key Characteristics of TIC

• Undivided Interest: Each co-owner has the right to possess and use the entire property, regardless of their ownership percentage. No single owner can claim exclusive rights to a specific part of the property.
• Unequal Shares: Ownership percentages can be tailored to reflect each investor's contribution or desired stake. For example, one investor might own 70% and another 30%.
• No Right of Survivorship: Upon the death of a tenant in common, their interest passes to their heirs, not to the other co-owners. This is a crucial distinction from Joint Tenancy.
• Independent Transferability: Each owner's interest can be independently sold, mortgaged, leased, or willed without the consent of the other co-owners, though a TIC agreement often includes provisions for this.

Advantages and Disadvantages for Investors

TIC offers several benefits, particularly for investors looking to pool capital or engage in specific tax strategies, but it also comes with potential drawbacks.

Advantages

• Flexibility in Ownership: Investors can contribute varying amounts of capital and hold proportional ownership shares, making it ideal for diverse investment groups.
• Estate Planning Control: Owners retain control over who inherits their share, aligning with individual estate planning goals.
• 1031 Exchange Eligibility: TIC structures are often used to facilitate 1031 exchanges, allowing investors to defer capital gains taxes by reinvesting proceeds into a like-kind property, even if it's a fractional interest.
• Access to Larger Investments: By pooling resources, investors can acquire larger, more expensive properties that might be out of reach individually.

Disadvantages

• Potential for Disputes: Without a clear Tenancy in Common Agreement, disagreements can arise over property management, expenses, or exit strategies.
• Liability: Each owner is typically responsible for their share of property expenses and liabilities, but in some cases, all owners could be held jointly and severally liable for certain obligations.
• Partition Actions: If co-owners cannot agree, any owner can force a partition action through the courts, potentially leading to a forced sale of the property.
• Financing Challenges: Lenders may be hesitant to finance individual TIC interests, often preferring to lend against the entire property, which requires all owners to be on the loan.

Real-World Examples of TIC

Tenancy in Common is a versatile ownership structure used in various real estate investment scenarios.

Example 1: Commercial Property Investment

Three investors, Alice, Bob, and Carol, decide to purchase a $3,000,000 commercial office building. Alice contributes $1,500,000 (50%), Bob contributes $900,000 (30%), and Carol contributes $600,000 (20%). They structure their ownership as Tenancy in Common. They agree to share rental income and expenses proportionally to their ownership percentages. If the property generates $300,000 in annual net operating income (NOI), Alice receives $150,000, Bob receives $90,000, and Carol receives $60,000. If Alice later decides to sell her 50% interest, she can do so independently, though their TIC agreement might grant Bob and Carol a right of first refusal.

Example 2: 1031 Exchange with Fractional Ownership

David, a real estate investor, sells a rental property for $800,000 and wants to defer capital gains taxes using a 1031 exchange. He identifies a $4,000,000 apartment complex but doesn't have enough capital to buy it outright. He partners with three other investors, each also performing a 1031 exchange, to acquire the property as tenants in common. David invests his $800,000, securing a 20% TIC interest in the apartment complex. This allows him to complete his 1031 exchange while gaining exposure to a larger asset than he could afford alone. The property is managed by a professional property management company, and all investors share in the income and expenses based on their 20% ownership.

Important Considerations for TIC Investors

1. Draft a Comprehensive TIC Agreement: This legal document is paramount. It should clearly outline each owner's rights and responsibilities, including capital contributions, expense sharing, income distribution, management duties, decision-making processes, dispute resolution mechanisms, and exit strategies (e.g., right of first refusal, buy-sell provisions).
2. Understand Tax Implications: Consult with a tax advisor to understand how TIC ownership affects individual tax liabilities, depreciation, and potential capital gains, especially in the context of 1031 exchanges.
3. Assess Co-Owner Compatibility: Since TIC involves shared ownership and decision-making, it's crucial to partner with individuals whose investment goals, risk tolerance, and communication styles are compatible.
4. Consider Property Management: For investment properties, establish clear roles for property management. This could involve one of the co-owners, or more commonly, hiring a professional property management company to handle day-to-day operations.