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A subcategory of concurrent estate, tenancy in common (TIC) is a bit misleading at first glance in that it has nothing to do with renters. Rather, it describes two or more parties who own a piece of real estate at the same time. The number of co-owners might even go up as high as a dozen or 50. While tenancy in common is an increasingly common alternative to limited partnerships, there are pros and cons to consider before entering into such an arrangement for an investment property.
Tenancy in common -- the definition
Tenancy in common is the most popular subcategory of concurrent estate. It's a way for multiple parties to own separate interests in a piece of real property. Tenants in common can be established by a deed or a will. Or, multiple parties can all agree on co-ownership and go into a deal together and all be responsible for part of a mortgage.
There are different kinds of TICs, including:
- Space-assignment co-ownerships (SACO-TICs) where owners split different parts of a property -- i.e., three co-tenants invest in a three-story row house and convert it to a triplex, each then having the right to use one floor.
- Time-assignment co-ownerships (TACO), which are better known as fractional ownership -- i.e., multiple owners can all use a property at an assigned time.
- Equity sharing co-ownership, where one party uses the property while others are strictly investors.
Tenancy in common property ownership has some things in common with joint tenancy. The key differences between the two are:
|Tenancy in Common||Joint Tenancy|
What types of property can be bought or converted to TIC ownership?
- Apartments/multifamily buildings
- Vacant lots
- Commercial buildings
Why would tenancy in common be used?
There are many reasons that tenancy in common might be used, starting with the millions of situations where a person wants to will one property to multiple beneficiaries. Then, there are all the situations where people might want to buy a home or rental property without forming a limited partnership or LLC. Overall, tenancy in common is what many people see as a comfortable way to co-own a piece of real estate without entering into a formal business partnership.
For example, say Mr. Jones wills a piece of property to his children in equal shares. He might establish tenancy in common as the way they inherit. Then, say the Jones siblings want to buy a house on the same block as their dad's house that they're renting out as an income property after his death. They see the second house as a long-term investment but not a full-on business. If owning their father's former house as tenants in common has worked out, they might purchase the next property together as tenants in common as well.
How to get tenancy in common
If the terms of concurrent tenancy are not established on paper, the default term when multiple parties own is tenancy in common (TIC). Of course, all parties can agree to this form of concurrent ownership. And, someone who is drawing up a will can confer tenancy in common on the beneficiaries who will inherit real property together.
What if one tenant wants to sell?
If one tenant wants to sell their share of a tenancy in common, they are able to do so. The new owner would then become the co-tenant.
Advantages of tenancy in common
- All tenants benefit when the property appreciates in value.
- Can be modified or created at any time.
- Co-tenants can change, either when one sells their share to someone else or when one wills the property to heirs and then dies.
- Share of property can be mortgaged.
- Co-tenants can own different/unequal percentages of a property.
Disadvantages of tenancy in common
- If one co-tenant stops paying their share of the mortgage, the other co-tenants are responsible.
- Close relationships with co-tenants aka co-owners make it awkward if you are in a SACO or TACO TIC and disagree on the rights of usage.
- In general, less protection than afforded by an LLC or LLP. For example:
- If remaining parties don't like or want to be in business with someone who buys a share of a TIC from the previous owner, there's little recourse.
- One owner can transfer their share without other owners' consent or force a sale of it.
- Any owner can file for a physical division of property (a partition action).
- When a co-tenant passes away, their share of the property can go to designated heirs who may want to do something else with the property.
The bottom line: Tenancy in common is increasing in popularity
As real estate, particularly residential, becomes more expensive, many people are turning to tenancy in common as the easiest way to buy property together, regardless of the various risks that come along with this type of concurrent ownership. It's true: Various things can go wrong. However, the flexibility of this type of ownership -- the fact that co-tenants can be added or removed, that ownership percentages can be changed, and that people can sell or mortgage their shares -- makes this arrangement very appealing because it does allow for some feeling of independent ownership.
And in many cases, these deals are sought by people who don't necessarily want to create an LLC or LLP just to buy a piece of property. They want to own a vacation home or an investment property that's outside their individual reach, and going into property ownership as a TIC with friends or siblings in good faith seems like the easiest way to achieve their goals.
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