If you’re planning on buying real estate with a friend, relative or business partner, you may consider a tenancy in common (TIC) agreement. This legal arrangement allows for shared ownership of a home and defines the ownership stake for each party.
There are several shared ownership agreements to choose from and this guide can help you decide if being tenants in common is the best route.
Tenancy in Common in Real Estate
Tenancy in common is a popular way for two or more individuals to purchase a share of a property, offering them equal access to the property. You can use this agreement for personal or commercial properties.
This legal agreement is most popular among friends, domestic partners and business partnerships, while other joint ownership structures are better suited for spouses and close relatives due to more favorable survivorship benefits.
There are three legal arrangements for multiple property owners:
- Tenancy in common: Owners can have unequal share stakes and sell their share at any time. Additionally, the stake of a deceased owner passes down to their heirs.
- Joint tenancy: Each tenant has an equal ownership share. When one tenant dies, the others absorb the deceased’s stake through a legal transfer process.
- Tenancy by the entirety: Reserved for married couples. In a tenancy by the entirety agreement, each spouse has an equal interest and the surviving spouse becomes the sole owner. One spouse can only sell or transfer their share with the permission of another spouse.
A real estate attorney can help you decide if it’s best to become tenants in common, joint tenants in common or, if you’re married, tenants by the entirety.
Tenancy in Common Example
Here is a quick example of how a TIC agreement could look like for three business partners buying an investment property.
Shared ownership percentages. Each member can have an equal, undivided share or different ratios. For example, Owner A can own 50%, Owner B can have 30% with Owner C claiming the remaining 20%. The property deed lists the corresponding owner percentages.
Property usage. Each owner has equal access to the property even when they have different stakes.
Adding owners or selling shares. Additional owners can be added to the property deed as necessary. Existing owners can also transfer or sell their shares to another party on demand.
When an owner dies. When a tenant in common dies, their stake can pass down to their heirs or estate. The other owners will not automatically assume the shares like in joint tenancy as there is no right of survivorship benefits.
Property taxes and expenses. Depending on the arrangement, each owner may pay taxes and ordinary group costs in proportion to their stake. However, the legal contract may also allow one party to pay for specific charges or individual costs.
Resolving disputes and deadlocks. A well-crafted legal agreement can explain which topics require a majority vote. Additionally, the contract can describe which general tasks only require action from one owner, such as repairing a water leak or a damaged roof.
In summary, all three owners share their expenses and any investment income earned in proportion to their ownership amount. While the sharing amount is usually percentage-based, it can be itemized by specific categories.
If one owner wants to sell or transfer their portion to another buyer, they can do so without permission from the other owners. However, unless the one owner forces a sale through legal action, they cannot sell the entire property without the approval of the other owners.
Joint Tenants vs. Tenants in Common
Most property co-owners will either choose a tenancy in common or a joint tenancy agreement. Below is a summary of how each legal arrangement works.
Pros and Cons of Tenants in Common
There are some advantages and disadvantages to joining a TIC that you should weigh before forming one.
Pros of Tenants in Common
- Flexible ownership interests: With a TIC, two or more co-tenants can have varying ownership percentages. This flexibility makes it easier for owners with limited funds to have fractional ownership in a home or investment property.
- Easily sell or transfer shares: One tenant can sell or transfer their shares without permission from the other owners, so long as it’s their individual share portion only. It can also be fairly easy to revise the deed to update the ownership interest as new tenants can be added.
- Heirs can inherit your shares: Your estate plan can designate which heir will inherit your share when you do. In contrast, a joint tenancy agreement transfers the shares to the surviving co-owners.
Cons of Tenants in Common
- No survivorship benefits: Unlike a joint tenancy agreement, surviving co-owners don’t automatically inherit a deceased tenant’s ownership share. This shift in ownership can create stress and lead to disputes.
- Forced property sales: A single tenant in common can force a property sale against the co-tenants wishes through a court-ordered partition action. Large properties may be subdivided proportionally but smaller lots may need to be sold with the proceeds split between the various owners.
- Equal responsibility for property taxes: Local tax departments typically send a single property tax bill and all owners are equally responsible for paying. A detailed legal contract may be required to determine how each tenant shares mandatory expenses.
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