Owning property with multiple people can lead to complex scenarios. Before taking part in a property with multiple owners, it’s best to know what you are getting into, what your rights are, and options that are available to you when it’s time to sell the property.
Management Decisions And Voting Rights
Decisions within tenants-in-common (TIC) vary depending on the size. For smaller groups, day-to-day decisions are often made by majority vote. Capital expenditures or changes in the allocation of usage rights or expenses are handled by unanimous vote. Logistics with smaller groups are simpler. It’s easier for a small number of people to meet and form a consensus than it is for a larger group.
Larger groups need different strategies when it comes to decision making, mainly because of the difficulty in getting everyone together for every decision. To get around this problem, committees or elected boards are created to handle day-to-day operational matters. Larger decisions may require a majority, super-majority, or unanimous vote of all owners.
The previously mentioned three voting options are formal structures. Smaller groups have more leeway in how they choose to handle management. This isn’t to say that smaller groups should wing it. Also, sitting back and assuming someone else will handle an issue isn’t a good long-term strategy, as everyone looks to everyone else to jump in and handle the situation. Some structure (via rules) is needed to ensure efficient operation.
Formalizing agreements solves this problem. Voting on every decision is probably impractical. Instead, co-tenants should be given particular roles to ensure the upkeep of the property.
Joint Ownership In The Relinquished Property
When a property is 1031 exchanged, the entity relinquishing the property must be the same entity exchanging into the new property. How is an entity identified — through its tax return? For example, if an individual holds the relinquished property, the new property must be taken by an individual. Conversely, if an LLC relinquished the old property, an LLC must take the new property. Keep in mind that some scenarios may vary.
Disregarded Entities And How They Are Treated In An Exchange
There are four exceptions to the above tax return rule. These exceptions are called disregarded entities.
Revocable Living Trusts — a revocable living trust doesn’t file a tax return but can hold title to a property. If a person owns the property held by the trust, they will relinquish the property under their individual tax return and take the new property under their name rather than the trust.
Illinois Land Trusts — for exchange of property, this type of trust works in the same way as a revocable living trust. Although with an Illinois land trust, an owner can sell their share of the property under their personal tax return. Some other differences with the Illinois land trust are that it is meant to hide the owners from public view, owners are listed as beneficiaries of the trust, and all owners share in full liability regardless of how much of the property they own.
Single-Member Limited Liability Companies — an LLC offers protection from liability. Single-member LLCs file tax returns as an individual, as they are pass-through entities. During a 1031 exchange, since the individual owns the relinquished property (through the LLC), they also take the new property under their name. The exchange becomes more complex with multiple members. In order to do a 1031 exchange, each member must form a single-member LLC to complete the exchange.
Delaware Statutory Trusts (DST) — for properties with joint ownership, a DST may be the best solution to allowing multiple members to 1031 exchange into another property. The DST holds the title to the property. The DST also offers each member protection, does not require them to form a single-member LLC, and each member is a beneficiary of their share of the property. A single-member can sell their share of the property and 1031 exchange into a new property.
Joint ownership can be a great option when you don’t have enough capital to purchase a property, or the property is already owned by others who do not want to sell. As more people are involved, ownership can become more complicated. Knowing your rights and responsibilities are steps in the right direction to ensuring a positive outcome.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not offer legal or tax advice. As such, this information should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult with a qualified professional.
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