In real estate investing, one property doesn’t always mean one owner. There are various property types where multiple people may hold title to a single asset, such as inherited homes and investment properties. One structure that allows such an arrangement is the tenancy-in-common (TIC). In this type of ownership, you own fractional interests and have equal rights of ownership to the TIC property.
Realized 1031 goes in-depth about the idea of the TIC house to help you understand what it is and how it works. Let’s take a closer look.
Recap of Tenancy-in-Common Structures
A TIC house is a property owned by two or more individuals, where each owner holds a separate, undivided ownership interest in the entire property. However, the main difference between TICs and other ownership structures is that TICs typically involve unequal shares. You can own 50% of the property, while two co-owners can have 25% each.
Even with these ownership differences, each tenant has the same rights to use and access the entire property. You are not limited to only a few rooms or units. As such, it’s common to see TIC arrangements for owning residential properties, vacation homes, and real estate investments.
Definition of a Tenants-in-Common House
The TIC property is simply the real estate asset under the TIC agreement. These have become increasingly common as real estate investments over the past few years.
There are a few reasons for this heightened appeal. For small-time investors, TICs provide access to assets that would usually be out of reach for most. There’s also the lack of rights of survivorship. This means that if one owner dies, then their heirs receive the TIC interests instead of being distributed to the remaining co-owners of the TIC. This practice follows the concept where each co-owner is treated as a separate entity.
TIC Real Estate Ownership
Based on the structure of TICs, flexibility in ownership arises as their most promising feature. Ownership shares can be divided in almost any way the parties agree on. These percentages are outlined in the property’s deed and may reflect the following.
- How much money each person contributed to the acquisition
- Contributions for improvements or major capital updates
- Buy-in amounts for later investors
- Estate planning or inheritance arrangements
Most importantly, ownership percentages don’t automatically dictate responsibility over net operating expenses and other property-related costs. All owners may be jointly responsible for property taxes, mortgage payments, and maintenance, regardless of ownership percentages, unless an explicit written agreement exists.
Investing in TIC Properties: Why It’s a Strategic Move
There are various reasons why investors find TIC homes appealing. Here are some of what you can expect.
- 1031 Exchange Eligibility: TIC interests are qualified as like-kind assets. This allows you to end a 1031 Exchange through a TIC, ensuring tax-deferral benefits and preserving your wealth for longer.
- Access to Institutional-Grade Assets: You can pool your capital with other investors to acquire assets that would normally be out of reach. These include large vacation rentals, large apartment complexes, and medical office buildings.
- Professional Management: TICs limit co-owner involvement to landlord rights, but the property can still be under the management of professionals who have the systems and experience to ensure the asset maintains profitability.
- Lower Barrier to Entry: Because you are only buying a fractional share, the minimum investment is much lower than buying an entire building.
- Flexible Ownership Structures: As we mentioned, TICs treat each co-owner as a separate entity. This means that you gain a deeded interest in the asset. Thanks to this benefit, you can leave your specific share to heirs instead of it being distributed to remaining co-owners. Plus, you have the right to sell, mortgage, or transfer your percentage of the property however you wish.
Considerations When Investing in a Tenants in Common Home
Like any other investment, TICs have their own set of risks and challenges you’ll need to consider. For one, the performance of the property can be unpredictable depending on market factors and strategies you employ for income generation. There’s also the fact that all owners share financial liability, regardless of their ownership percentages. This also applies to loans. If one owner dies, the rest must take on the remaining mortgage payments.
It’s important to consider these realities and possibilities when investing in TIC houses. That way, you are prepared and avoid unexpected issues down the road.
Wrapping Up: The TIC Property Explained
Entering a TIC agreement and owning a TIC property is a powerful investment strategy. You own an asset with other co-owners, whether for investment, family, or personal reasons. When paired with a 1031 Exchange, there’s also the benefit of tax deferral. Even with these advantages, the same structure can lead to challenges such as shared financial responsibility and rigid 1031 Exchange compliance requirements. As such, a deep understanding of these assets is key to making informed decisions and investment success.
Sources:
https://www.irs.gov/pub/irs-drop/rp-02-22.pdf
