Tenants-In-Common (TIC)

Tenants-in-Common in Real Estate Ownership: Everything You Need to Know

Real estate provides a range of potential benefits for both novice and experienced investors. They can possibly earn recurring income from rent, as well as income from appreciation if their properties increase in value during the time they hold the assets. Investors can defer capital gains taxes by completing 1031 exchanges, and also realize significant depreciation deductions when filing their annual income taxes.

In the article below, we’ve covered many aspects of an investment strategy investors use to purchase fractional shares in a wide range of real property assets. The Tenant-In-Common arrangement allows investors to join a pool of co-owners and purchase assets that oftentimes would be beyond their reach as solo investors. TIC opportunities are often pre-packaged by a sponsor and include professional property management. Financing may already be secured as well, which can lead to greater efficiency in identifying, acquiring, financing and closing on a TIC property for a 1031 exchange.

Investors considering this type of ownership structure to complete a 1031 exchange should consult with qualified accountancy and tax professionals to ensure they adhere to important IRS guidelines and timelines.

What is a Tenant in Common?

tenant-in-common-abstract-multi-floorTenant-In-Common, or TIC, is a legal ownership structure wherein multiple 1031 exchange investors co-own individual undivided interests in real property assets. Owners can hold unequal shares, and they can sell or mortgage their shares independently from other tenants. Co-owners aren’t actually tenants in their properties, though -- the true “tenants” are the property leasees.

TICs have some specific IRS guidelines that investors must meet to be eligible for the tax-deferred benefits of a 1031 exchange. Foremost among these is that taxpayers must reinvest the proceeds from the sale of real property into like-kind assets; benefits don’t apply if those proceeds are reinvested in REITs, partnerships or LLCs.

Additional IRS guidelines for Joint Tenancy-In-Common arrangements include:

  • Co-owners must share costs related to debt servicing and other expenses based on their pro rata shares -- same with income distributions. Only the parties listed on title can receive profits or pay for expenditures.
  • The number of co-owners is capped at 35.
  • TIC sponsors can’t be compensated through income or returns to investors.
  • All decisions regarding material usage must be unanimously approved by all co-owners.

Another important aspect of TICs is that co-owners can bequeath their shares to an heir of their choosing upon their death.

Compare 1031 TIC Properties Side-by-Side

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Why Choose a Tenant-In-Common Arrangement for a 1031 Exchange?

Savvy investors often complete 1031 exchanges to defer capital gains taxes on the sale of real property by reinvesting those funds in like-kind assets. A Joint Tenants-In-Common exchange happens when two or more owners share fractional interests in a property purchased through the 1031 exchange process.

There are many reasons investors may want to consider this option. Since there can be up to 35 investors, minimum investment thresholds can be much lower for individual investors. Investment amounts also can be flexible since co-owners can hold unequal ownership stakes.

Lower minimum investment amounts also allows individual investors the opportunity to spread their investment dollars around into multiple properties and different asset classes. This portfolio diversification can prove important to weathering regional market downturns. Having a pool of investors also provides a deeper team of resources to draw from for day-to-day property management decisions, lease negotiations and other important aspects of being a landlord -- you don’t have to go it alone.

How are TICs Different From Joint Tenants in Common?

In a TIC, co-owners hold fractional shares of a property. A Joint Tenancy-in-Common, however, is a partnership wherein investors hold equal interests in an asset. In order to create a Joint Tenants-in-Common, owners must meet the following “unity” conditions:

  • Undivided right to possession
  • Equal interests
  • Ownership is acquired simultaneously
  • Each owners name is listed on the deed

One key difference between TICs and Joint Tenants in Common ownership is what happens to shares if a co-owner dies. With a TIC, you can bequeath your interests to your heirs. In a Joint Tenancy-in-Common, if a partner dies his or her shares pass to the other partners under “rights of survivorship.” There are pros and cons to both approaches. On the one hand, surviving owners in a Joint Tenancy in Common don’t have to go through the lengthy probate process to determine the fate of their properties -- they effectively absorb the deceased partner’s shares. On the other, these owners can’t pass their ownership shares along to an heir of their choosing.

Lastly, in a Joint Tenant-In-Common, all owners must agree to sell simultaneously -- one partner can’t exit the Joint Tenancy ownership structure early.

How is a Tenancy-In-Common Different From a Delaware Statutory Trust?

TIC arrangements share some similarities with Delaware Statutory Trusts (DSTs). Both allow fractional investments and can be used in a 1031 exchange. However, there are some key differences. Among them:

Passive ownership

DSTs are professionally managed by a property manager and the DST sponsor. Owners are not involved in the daily operations of their assets. With TICs, all owners are required to vote unanimously on important property management issues that will be carried out by the TIC sponsor or property manager.

Unlimited investors

A Tenant-In-Common can have up to 35 individual investors. There are no limits on how many investors can own fractional interests in a Delaware Statutory Trust.

Financing

Debt taken on in a DST isn’t assumed by individual investors; rather, it’s assumed by the DST since the trust is the title holder of the property. DST investors won’t show mortgage payments on their balance sheets. It’s the exact opposite for a TIC. Each co-owner is a titleholder and will have to make mortgage payments. That fact often makes it difficult to obtain financing for a Tenant In Common arrangement since each owner must be approved by a lender.

Investment thresholds

In a TIC, ownership is limited to 35 investors, so each owner may have to put up a larger investment sum when purchasing higher-value assets. DSTs, on the other hand, have an unlimited number of investors, so investment minimums are usually lower. Tenant-In-Common investments may require a $500,000 investment stake compared to $100,000 for a DST.

Executing a 1031 exchange

Both ownership structures qualify for like-kind exchanges of equal or greater debt. That last, though, can make DST exchanges easier to complete since investors have lower financing ratios of non-recourse debt.

The TIC eBook: A great resource for Tenants-In-Common investing

  • What is a Tenancy In Common?
  • What are the advantages and disadvantages to TICs?
  • How do fractional 1031 investments work?
  • Does a Tenant In Common fit with my goals?
  • How do I find Tenants In Common properties?
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Pros of Investing in a Tenant-In-Common Property

Many investors complete 1031 exchanges into a Tenant In Common property to defer capital gains taxes after the sale of a real property asset. In addition to some of the benefits outlined above, there are multiple reasons why investors should consider a 1031 exchange into a TIC arrangement:

Timing and pre-packaging

The IRS has strict regulations on completing a 1031 exchange. Investors have 45 days to identify a like-kind replacement and 180 days to close on their new investment. Sponsored TIC properties simplify and expedite this process in numerous ways. All due diligence, such as inspections, financials and rent rolls, has already been completed by the sponsor. Financing also is already set up.

Depreciation

Investors can incorporate annual depreciation deferral deductions on their tax statements.

Potential recurring income

Lease payments by tenants are distributed to the TIC property owners. Funds are deposited directly into your bank account on a monthly basis, when applicable.

Diversification

Investors can exchange into multiple properties, which can provide portfolio diversification by asset type and geographical region.

Limited expenses and fees

Most TIC investment properties have minimal associated fees since sponsors have already completed appraisals, reports and other basic investment documentation. Closing costs also are not usually included in the exchange process.

Cons of Tenancy-In-Common Investments

TIC properties can provide many appealing investment incentives, but there can be some drawbacks to the Tenant in Common arrangement as well. These include:

Common ownership and control

Major operating decisions about a TIC property must be unanimous among all owners. This could prove problematic if investors have different goals, objectives or viewpoints on how the property should be run and managed. Unanimous approval also is required for co-owners to sell or refinance the property, as well as sign new leases or hire new management.

Cost

The sponsor who packages and organizes the TIC will receive a percentage of investment funds for his or her efforts. Likewise with the licensed broker who sells TIC shares to the investor pool.

Investor limits

The 35-member cap on investors can exponentially increase the minimum equity required by co-owners, particularly for higher-quality assets that command premium pricing. However, since TIC shares can be owned in unequal proportions, key investors may decide to put up larger investments as it suits their investment strategies.

Financing

Since each co-owner is also a co-borrows on the property, financing can be difficult to obtain. Many lenders choose to pass on this ownership structure due to the complexity of paperwork involved.

Control

No single Tenants in Common investor in a given property owns it outright. If one co-owner has a lien or judgement filed, it could negatively impact other co-owners.

Illiquidity

While Tenant In Common interests can be sold, and you don’t need approval from other owners, there might be an agreement in place for right of refusal. Similarly, it might prove difficult to dispose of your interests due to a lack of potential buyers.

Know Your Rights as a Joint Tenancy In Common Owner

The simple truth is that owning real estate with multiple parties can lead to some complex decisions, especially if owners have conflicting interests. It’s important to know your rights as a joint owner before entering into a Tenant-In-Common agreement.

In smaller TIC structures, lesser day-to-day management decisions can be made by a majority. Oftentimes, TIC owners create boards or committees to handle lesser operational issues. Important issues, such as funding for large capital expenditures for repairs or other costly line items, require a unanimous ownership vote.

It can easier to reach a consensus among smaller ownership groups. Likewise, it may prove much more onerous to get everyone on the same page in a larger pool of co-investors. Joint Tenant In Common ownership structures allow investors to acquire higher-grade assets through the greater purchasing power of their combined capital, but as a general rule, the more investors involved the more complicated the decision-making process can become.

When Co-owners Have Conflicting Interests -- Petition to Partition

A major benefit of TIC ownership is the ability to bequeath your interests to your heirs. But sometimes those heirs might not want to own real estate and are looking for a cashout. Since Tenants-In-Common owners cannot sell an asset without unanimous owner agreement, this can create problems if one or more owners want to liquidate their shares of the asset. They can legally force a court-ordered sale through a process called partition by sale.

This can be a time-consuming, costly and emotionally draining process for co-owners -- the petition process can last up to 12 long months. In some cases, the asset could be disposed of on the steps of your county courthouse via auction. In others, a judge might order a forced sale through receivership. Both scenarios could result in a reduced sale price and an undesirable outcome for co-owners.

There are ways to prevent these outcomes. Co-tenants can agree to buy out the dissenting owner’s shares, or they can hire a mediator to help bring about a successful resolution. Despite the many benefits of TIC ownership, there are some potential drawbacks. Investors can consult legal counsel prior to participating in a Tenants In Common structure to better understand the benefits and any potential pitfalls they might face down the road.

Tenants In Common and Probate

Probate is the process of settling a person’s estate after they have died. During probate, a court oversees the distribution of assets left by a deceased person. Some joint ownership structures require probate, while others do not. In this article, we’ll look at each in detail.

In a joint tenancy, owners can bequeath their shares of real property to an heir of their choosing. It’s the opposite in a Tenant-In-Common -- owners must go through probate upon the death of an owner.

During probate, a court administers the distribution of the deceased’s assets when there’s no clearly defined beneficiary, and it’s sometimes used even when the deceased leaves a will or trust to guide the disbursement of his or her assets.

Real property owned through TICs must go through probate when an owner dies. The process can be lengthy and often leaves surviving owners in limbo while it plays out -- surviving owners will have to work through the executor to mortgage or improve the asset during this time. If the deceased left a will or living trust, then his or her wishes for their shares can be clearly communicated and the remaining owners know the likely outcome of the probate process. This information is crucial to helping ensure a favorable outcome in joint ownership arrangements.

Changing Ownership Structures: Joint Tenancy to Tenant-In-Common

It’s possible to change ownership structures from Joint Tenancy to Tenants-In-Common. There are two ways to accomplish this goal:

Agree to a quitclaim deed

Under this method, one party is removed from the deed, which transfers ownership rights to the other party. Each tenant effectively transfers rights to themselves. Joint tenancies with more than two tenants can also execute this type of transfer. Doing so terminates the original ownership arrangement.

Go Through a Title Company

A title company creates a deed transfer wherein owners transfer ownership to themselves. Execution of the deed transfer creates the Tenant-In-Common ownership structure. Each owner and their pro rata shares are listed on the deed transfer, which must be signed, notarized and filed at your local county courthouse.

Engaging professional help in this process, which takes more time and involves some out-of-pocket expenses, can help ensure the ownership transfer is completed correctly.

Putting it All Together

There’s no right or wrong with the Tenant-In-Common ownership structure. Investors considering this type of arrangement should carefully evaluate the pros and cons outlined above to determine how a TIC opportunity fits into their personal investment philosophies. Experienced real estate Investors used to making key management decisions may chafe under co-ownership restrictions that require unanimous agreement. Conversely, novice investors may enjoy the benefits working with a pool of more-experienced investors and the added heft of shared investment dollars. The Tenancy-In-Common structure continues to be a favorable investment structure and is just one tool available for investors to help preserve personal wealth through 1031 exchanges.

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.

This information does not constitute tax or legal advice. One should consult the appropriate professional regarding their individual circumstance.

The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time.

 

Selected Blog Articles


Do Tenants In Common Pay Inheritance Tax?

A common question from someone inheriting a property held by Tenants-In-Common (TIC) is if there is a need to pay inheritance tax.

Nov 4, 2020

Can I Change From Joint Tenants To Tenants-In-Common?

There is no formal process that transitions from joint tenants to tenants-in-common. Instead, the joint tenants must be terminated and new tenants in common created. How simple the transition is depends on how you go about it. In this ...

May 20, 2020

Petition To Partition: When Co-Tenants Just Can't Agree

Imagine the following.

Apr 22, 2020

Terms to Know


Tenant-In-Common (TIC) Properties

Tenant-in-common properties are any property purchased by multiple investors via a Tenant-In-Common structure. See Tenant-In-Common Investments.

Joint Tenancy

Joint tenancy is ownership of real estate by two or more individuals with the right of survivorship. A right of survivorship means that

Tenants-In-Common (TIC)

Tenants-In-Common is a type of shared ownership of property, where each owner owns a share of the property. Unlike in a joint tenancy, these shares can be of unequal size,

Tenant-In-Common (TIC) Investments

Any syndicated investment created through a Tenant-In-Common (TIC) structure. Under a Tenant-In-Common structure, each investor

Tenant-In-Common Sponsor

The individual or company that packages and markets Tenant-In-Common (TIC) properties. The sponsor is in charge of a variety of different