Tenants-In-Common is a structure for sharing property ownership among two or more people. The unique aspect of TIC arrangements is how flexible the design is. For example, TIC can include a shared rental property owned jointly by two best friends or, on the other end of the spectrum, a professionally managed company promoted by a Sponsor.
Unlike other shared ownership templates, in a TIC, each owner’s share can be a different size, and there are no rights of survivorship. That means that each owner controls their share, can sell it at will, and bequeath it to a person or entity of their choice. This control differentiates the TIC model from Joint Tenancy-In-Common arrangements, which do include rights of survivorship, meaning that remaining owners share the portion of any owner who dies. Since the ownership stake may be unequal, the distribution of costs and profits is determined according to the ownership share.
Unlike a DST (Delaware Statutory Trust), a TIC group of owners can't exceed 35 individual investors. All must agree on management actions, whether or not there is a Sponsor or property manager. In a DST, investors are not involved in operations. Depending on the cost of the assets owned, the limitation of 35 investors in a TIC may increase the cost of entry.
First, the Sponsor likely identifies a property, buys it, and resells it to the TIC group, managing the transaction and earning a fee, typically five to seven percent of the purchase price. The Sponsor is responsible for researching the opportunity, performing due diligence, negotiating the deal, arranging financing, and finding the investors.
Once the property is acquired, the Sponsor is responsible for managing it according to the TIC agreement. Typically, the Sponsor will engage a property manager or master tenant for this administrative oversight. The agreement should also outline when the property can be disposed of or what factors determine the decision. The contract should indicate whether the co-owners have the right of refusal when individual investors want to liquidate their stake.
Typically, a Sponsor may initiate a contract for an identified property and seek investor participation while the asset remains in escrow. When the group is assembled, the Sponsor can close the sale and then issue a separate deed for a fractional undivided interest to each investor. However, suppose the transaction is being executed under time pressure, such as with a 1031 exchange. In that case, the Sponsor may need to buy the property first and sell each investor a share after the initial closing. This approach can avoid risking the success of the 1031 transaction.
The attraction of investing in a TIC structure is potential access to more expensive property than the investor can purchase individually. By pooling funds with other investors, you may be able to own property that is out of reach to you on your own. In addition, a Sponsor may offer opportunities you would not otherwise be aware of. The tradeoff is sharing control and decision-making responsibility with others.
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.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Examples are hypothetical and for illustrative purposes only. Withdrawal strategies should take into account the investment objectives, financial situation and particular needs of the individual.
Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.