There are numerous ways to own property. Some systems enable several owners to hold a single property instead of just one, such as tenants in common under a tenancy in a typical (TIC) agreement. TIC fractional ownership has some significant benefits, but is it wise? What you need to know is as follows.
- Understanding Common Tenancy.
- The definition of “tenants in common.”
- between tenants in common and joint renters.
- How the common tenancy operates.
- Tenants in common disagreements
- Is shared housing a wise decision?
Understanding Common Tenancy
Real estate title ownership can be done in a variety of ways. A tenancy in the standard agreement is one of them. Tenancy in common is defined as “ownership of real property by two or more individuals, in equal or unequal shares, each who have an equal right to possess the whole property,” by Bradd S. Robbins, an attorney of Willinger, Willinger & Bucci, P.C., a LegalShield provider law firm. Other forms of shared ownership arrangements exist, such as joint and tenancy by the entirety. Tenancy in common does not provide a right of survivorship like the other two do. In other terms, each owner’s portion passes to their heirs or the beneficiaries listed in their will upon passing, according to Robbins.
“Tenants in Common”: What Is It?
Tenants in common are indeed the owners of the shared property, whereas a tenancy in common is the ownership model. Each tenant in common has rights to all sections of the property and equal or unequal portions of ownership interests. This implies that in addition to having certain obligations, every tenant in common has the right to utilize the property. Each renter is responsible for their fair portion of the property tax, mortgage, regular expenses, and other property obligations. All renters in common should pay financially if repairs are required.
Whenever ownership holdings are titled and registered in an individual’s name, tenants in common also run the risk of having a limitless amount of personal responsibility. For this reason, limited liability corporations, or LLCs, are frequently created, especially by real estate speculators, to participate in tenants-in-common ownership structures. According to Meyer Mintz, tax director at Citrin Cooperman Advisors LLC and Berdon Advisors LLC in New York, there is no asset protection without creating a limited liability corporation. According to Mintz, someone who slips and falls in a building where I possess a 25% undivided stake has the right to sue me for all of my assets. “Generally, as a 25% owner, you would bind yourself to an LLC. Consequently, there is some asset protection.
Mintz continues, “You may have three persons own the LLC, a tenant in common.” This is also the location where more complex TIC arrangements are seen.
Tenants in common versus joint tenants
According to Robbins, a joint tenancy occurs when two or more co-owners acquire real estate ownership concurrently and with the same right of possession. Joint tenants, however, each have a right of succession to the other’s portion, unlike tenants in common. As a result, when an owner passes away, their ownership interest in the property immediately passes to the remaining owner(s). In certain areas, this must be expressly stated in the transfer, according to Robbins, or else the tenancy will be assumed to be a TIC. “In a few places, a married couple’s joint tenancy is also known as a tenancy by the entirety. If a conveyance to a married couple in those states does not identify tenants in common, a tenancy by the whole may be presumed, according to Robbins. It is essential to consult with a lawyer.
How Tenancy in Common Operates
States may have different laws governing tenancy in common, and individual cases may also have separate TIC agreements’ stipulations. However, it typically entails:
- At least two shared renters A TIC must have at least two owners to be considered complete, and the IRS’ Revenue Procedure 2002-22 allows for a max of 35 co-tenants.
- Shares of ownership do not need to be equal. Either tenant in common may own equal or unequal portions of the property.
- A tenancy in common may be terminated or modified. TICs do not have to last forever. According to Robbins, “Any party can sell their interest.” “The parties should take into mind, especially if it’s an investment opportunity, that they may have a new partner and place constraints by separate agreement upon the capacity to sell without providing the other party a first right of refusal, or even another legal arrangement,” according to the article.
As an illustration, according to Robbins, if A and B are tenants in common and A has one-third and B owns two-thirds of a house, they both have the right to live in the entire house. Even if B sells their shares to C, A will still possess a third of the property. Additionally, B is under no obligation to sell their portion of the property to a buyer with whom A endorses or concurs. Another illustration: According to Robbins, if A and B possess a home as tenants in common and A passes away, B will not automatically become the owner of the house unless A gave A’s share to B in a will or if there is no will and B is A’s sole heir.
TIC Conflicts
The renters in common should attempt to settle differences among themselves first if there is a disagreement. If this is not possible, Robbins advises contacting a qualified lawyer. Because each owner has an equal claim to own the entire land, neither may evict or otherwise pressure the other owners, according to Robbins. “A partition action, a lawsuit initiated to settle the conflict, may be required. The court frequently orders the parties to reach a settlement or sell the property after a partition case.
Is Tenancy in Common a Smart Move?
You have a few alternatives when it comes to how the title of the property will be recorded when you buy property jointly. When purchasing a home with someone not connected to you or for investment purposes, it may be wise to title the property as tenants in common. The possibility of performing a tax-deferred exchange is a significant advantage of tenancy under standard agreements. According to Mintz, the benefit of a residence in common is either to perform a like-kind trade or to prepare for a possible future like-kind exchange. However, the IRS states that the TIC’s status must remain legitimate.
According to Mintz, “The IRS issued Revenue Procedure 2002-22, which essentially specifies the elements, the IRS will not provide you a personal letter ruling if you do not have these reasons.” And even if it’s not a safe harbor, most practitioners take that to be gospel, trying to stay within what they refer to as the “safe harbor” The IRS might not provide you an advanced judgment indicating that it is a tenancy in common, according to Mintz, even if all of the elements are true. Before the IRS delivers a private letter ruling, all conditions must be satisfied.
