You’ll encounter many types of property ownership arrangements as a real estate agent. For example, you may be tasked with finding a vacation home for a group of friends –or a home for an unmarried couple with separate finances. This type of ownership may be categorized as tenancy in common.
Clients who wish to share property ownership should seek independent counsel from an estate attorney and a tax professional to walk them through the legal process and the tax ramifications of purchasing a property together. However, as a real estate agent, you also need to understand the basics of this type of arrangement. Here’s the answer to the question, “What is tenancy in common?”
What Is Tenancy in Common (TIC)?
Tenancy in common is a form of property ownership in which two or more individuals own a property together, each holding a percentage share of the property. Unlike joint tenancy, tenancy in common does not have a right of survivorship. This means each owner’s share can be passed to their heirs or sold independently upon their death instead of going to the other property owner.
For example, four friends buy a lake home. Each pays for a quarter of the property and expenses and can use the full property one week a month. This is an example of tenancy in common. It’s important to note that in this scenario, if one friend dies, that person’s percentage of interest in the property goes to their heirs—not the surviving three friends.
Other Forms of Tenancy
What other forms of tenancy are there? Knowing the basics of different types of ownership arrangements may help you better understand tenancy in common. While a sole proprietorship refers to one individual having full ownership of a property, here are the types of tenancy options for two or more people.
Joint tenancy
In joint tenancy, co-owners have equal shares of a property and the right of survivorship. If one owner dies, their share automatically passes to the surviving owner.
Tenancy by entirety
Tenancy by entirety is only available to married couples. This arrangement offers the right of survivorship. Additionally, the property is protected from creditors who may have claims against only one spouse. This means that if one spouse has individual debts, creditors cannot force the sale of the property to satisfy those debts as long as the other spouse does not share the liability.
Related Article: Home Co-Ownership: Tips for Buying a Home With a Partner
How Tenancy In Common Works
Again, your clients need to seek the advice of an attorney and tax expert when purchasing or selling a property with this legal arrangement. However, here’s some general information about how tenancy in common works.
Shared ownership percentages
In a tenancy in common ownership agreement, each co-owner holds a specific percentage of the property, which may differ from one owner to another. These percentages may reflect each owner’s financial contribution or agreed-upon share and determine their rights to profits and responsibilities for expenses. Unlike other ownership types, these shares can be unequal, and each owner’s percentage is essential for calculating their portion of property taxes, income, and expenses. Defining these percentages in the agreement helps prevent disputes and ensures equitable property management.
Property usage
Each co-owner has the right to use the entire property in a tenancy in common agreement. However, to avoid conflicts, co-owners should agree on how and when the property can be used. This might involve creating schedules or specific terms of use, particularly if the property is a vacation home or rental.
Adding owners or selling shares
In a tenancy in common, each owner has the right to sell or transfer their share of the property independently of the other owners. While getting consent from other owners to sell or transfer a share is not legally required, it’s often wise to discuss it to avoid potential disputes.
When an owner dies
When an owner in a tenancy in common arrangement dies, their share of the property does not automatically transfer to the surviving co-owners. Instead, it becomes part of the deceased owner’s estate and is distributed according to their beneficiaries. The beneficiaries then become the new co-owners, inheriting the deceased owner’s percentage and rights.
Property taxes and expenses
In a tenancy in common agreement, all co-owners are responsible for their share of property taxes, maintenance, and other expenses. Each owner’s contribution is usually proportional to their ownership percentage. It’s important to have a clear agreement that outlines how these costs will be divided and who is responsible for paying them.
Pros and Cons of Tenancy in Common
Tenancy in common agreements should be carefully considered. While this type of ownership agreement has some benefits, it could also have many negative outcomes.
Pros of Tenancy in Common
- Tenancy in common agreements allow co-owners to have unequal shares of a property.
- Each owner can sell, transfer, or will their share independently of the others, providing flexibility in managing their investment.
- Unlike joint tenancy, tenancy in common allows an owner’s share to be passed on to their beneficiaries rather than automatically going to the surviving co-owners.
- A tenancy in common agreement makes it easier to invest in real estate that might otherwise be unaffordable.
- Co-owners can tailor the terms of their ownership agreement to suit their specific needs, including usage rights, responsibilities, and decision-making processes.
Cons of Tenancy in Common
Some of the benefits of tenancy in common arrangements can also be drawbacks – in certain situations.
Differences in ownership percentages and usage rights can lead to conflicts among co-owners, especially if no explicit agreement exists. (For example, a person with a smaller ownership percentage may overuse the property.)
Since each owner has an independent interest in the property, unanimous decisions can be challenging to achieve, complicating property management or sale.
If an owner sells or wills their share to someone else, the remaining co-owners may end up with a new co-owner they didn’t choose, potentially causing friction.
Each owner is responsible for their share of property taxes, maintenance, and other expenses. If one owner fails to pay, the others may be left to cover the shortfall, leading to financial strain.
Again, encourage your clients to have independent counsel when setting up a tenancy in common arrangement. Do you want to learn about different types of ownership agreements? Take continuing education courses with Colibri Real Estate School. Colibri is your one-stop-shop provider of all the courses you need throughout your real estate career – from pre-licensing classes to become an agent to broker courses. Contact a real estate licensing specialist to learn more about the requirements in your state.
Key Takeaways
- In a Tenancy in Common (TIC) arrangement, two or more individuals own a property together, each holding a percentage share. These shares can be unequal, and each co-owner can use the entire property. Unlike other forms of property ownership, a TIC allows for the independent transfer or sale of each owner’s share.
- Unlike joint tenancy, TIC does not include a right of survivorship. This means that when a co-owner dies, their share passes to their heirs or beneficiaries, not automatically to the remaining co-owners. This can impact estate planning and property management.
- Each tenant in common is responsible for their proportionate share of property taxes, maintenance, and other expenses. Clear agreements are essential to prevent disputes over financial obligations and property use.
- TIC agreements offer flexibility, allowing for different ownership percentages and the ability to sell or transfer shares independently. However, this flexibility can lead to conflicts if not properly managed, particularly regarding property usage and decision-making among co-owners.
