Tenancy in common is a legal arrangement that allows two or more parties, or tenants in common, to share fractional ownership interest in real property.
Property ownership comes in many different forms. Instead of being a direct owner, there are structures that allow several owners, like tenants in common in a tenancy in common (TIC) arrangement, to hold title to a single property.
Fractional ownership in a TIC comes with key advantages, but is it a good idea? Here's what you should know.
Understanding Tenancy in Common.
What is ‘tenants in common’?
Joint tenants vs. tenants in common.
How tenancy in common works.
Is tenancy in common a good idea?
Understanding Tenancy in Common
There are several different structures to owning real property title. One of these is a tenancy in common arrangement. Bradd S. Robbins, attorney with Willinger, Willinger & Bucci, P.C., a LegalShield provider law firm, explains that tenancy in common is “ownership of real property by two or more persons, in equal or unequal shares, who each have an equal right to possess the whole property.”
There are other types of shared ownership structures, including joint tenancy and tenancy by entirety. Unlike the other two, tenancy in common has no right of survivorship. “In other words, each owner's share transfers on his (or) her death to his (or) her heirs, or to whomever they leave it to in their will,” Robbins says.
What Is ‘Tenants in Common’?
A tenancy in common is the ownership structure, while tenants in common are the owners of the shared property. Each tenant in common shares interests, in equal or unequal percentages, and privileges to all areas of the property. This means that each tenant in common has the right to use the property as well as certain responsibilities.
Tenants in common also face the potential for unlimited personal liability when ownership interests are titled and recorded in their own name. This is why it’s common, especially for real estate investors, to form limited liability companies, or LLCs, to invest in a tenants-in-common ownership arrangement.
Without forming a limited liability company, Meyer Mintz, tax partner at Citrin Cooperman Advisors LLC and Berdon Advisors LLC in New York, says there’s zero asset protection.
“If I own a 25% undivided interest in the building and someone slips and falls, they can sue me for everything I'm worth,” Mintz says. “Typically, you would put an LLC in between yourself as a 25% owner. Therefore, there's some level of asset protection.”
This is also where you see more complicated TIC structures, Mintz adds: “You can have three people own the LLC, which is the tenant in common.”
Joint Tenants vs. Tenants in Common
“A joint tenancy is ownership of real property by two or more co-owners who take ownership simultaneously by the same instrument and with the same right of possession,” Robbins explains. But unlike tenants in common, joint tenants each have a right of survivorship to the other’s share. So when an owner dies, their share of the property automatically transfers to the other owner or owners.
Robbins also points out that in some states, this must be clearly expressed in the conveyance, otherwise the tenancy will be presumed to be a TIC.
“In a few states, a joint tenancy between a married couple is also referred to as a tenancy by the entirety. A tenancy by the entirety may be assumed in those states if a deed to a married couple does not specify tenants in common,” Robbins adds. “It’s best to check with your attorney.”
How Tenancy in Common Works
The way tenancy in common works may differ from state to state and the terms of a TIC agreement may also vary by case. However, it generally involves:
At least two tenants in common. At least two owners are required to hold title to a TIC and the IRS’ Revenue Procedure 2002-22 states a maximum of 35 co-tenants.
Ownership shares do not have to be equal. Tenants in common can have equal or unequal shares of the property.
Tenancy in common arrangements can be dissolved or changed. TICs don’t have to be permanent. “Any party can sell their interest,” Robbins says. “The parties should take into consideration, especially when it is an investment property, that they may have a new partner and put limits by separate agreement upon the ability to sell without giving the other party a first right of refusal, or other legal arrangement.”
For example, if A and B own a house as tenants in common and A owns one-third of the property and B owns two-thirds, they both have the right to occupy the entire property, Robbins explains. If B sells their shares to C, A still retains one-third of property ownership. Furthermore, B does not have any obligation to sell their share of the property to a person that A approves of or agrees to.
Another example: Robbins says that if A and B own the house as tenants in common and A dies, B does not assume A's ownership unless A has left A's share to B under A's will, or there is no will and B is A's only heir.
If there’s a dispute between the tenants in common, the first step they should take is to try and resolve the issue on their own. If this is impossible, then Robbins suggests contacting an attorney who can help.
“Since the owners have an equal right to possess the whole property, neither can remove nor force the other owners from the premises,” Robbins explains. “A partition action may be necessary, which is a lawsuit brought to resolve the dispute. The partition action often ends with the court telling the parties to settle on their own, or sell the property.”
Is Tenancy in Common a Good Idea?
When purchasing property with another person, you have several options as to how the property is titled. Titling the property as tenants in common may be a good idea when purchasing a property with someone who is not related to you or for investment purposes.
A big benefit of tenancy in common arrangements is the ability to do a tax-deferred exchange. “The advantage of doing a tenancy in common is either to do a like-kind exchange or the anticipation of possibly doing a like-kind exchange later,” Mintz says. However, the status of the TIC must remain valid, according to the IRS.
“The IRS came out with Revenue Procedure 2002-22 that basically lists the factors saying the IRS won't give you a private letter ruling if you don't have these factors,” Mintz says. “And most practitioners look at that as the gospel and everyone tries to stay within what they call this ‘safe harbor’ even though it's not a safe harbor.”
According to Mintz, all factors could be true and the IRS won’t give you an advanced ruling stating it’s a tenancy in common. All factors must be met before the IRS sends a private letter ruling.