Tenancy in Common: Shared Real Estate Ownership

As you already know, there are multiple ways to own property. In real estate investing, you'll usually own a property under an LLC as a business. But every now and then, you might find yourself in a situation where you inherit or buy a property that is part of a tenancy in common arrangement, which is a different beast entirely.

A tenancy in common agreement involves shared rights to a single property with others, each holding different percentages of ownership interest. Here, we'll explore this approach to owning property, outlining its advantages, potential drawbacks, and how it compares to other forms of co-ownership.

You'll also gain an understanding of the legal implications and tax considerations related to this type of ownership structure. Whether you're a real estate investor, landlord, or just curious about tenancy in common, this article will provide a helpful overview for you!

What is tenancy in common?

Tenancy in common is when two or more people own different ownership interests in a single property. This means that the co-owners do not necessarily own equal portions of the property, and their shares can be of different sizes.

For example, if three parties purchase a property as tenants in common, one person could own 50% of the property, while the other two each own 25%. Each person determines their ownership percentage by contributing to the purchase price or by reaching an agreement among the co-owners.

Benefits of tenancy in common

What makes tenancy in common an appealing option? Here are some of the advantages:

Adaptable ownership stakes

One of the most significant advantages of tenancy in common is how flexible it is with ownership shares. Each co-tenant can own different percentages of the property, which means they can invest based on how much money they have or what they want to achieve.

Simple sale or transfer of portions

Tenancy in common also makes it easy to sell or transfer your share of the property. Unlike some other types of shared ownership, you don't need permission from the other owners to do this. You can manage your ownership share however you see fit.

Pass your shares to heirs

In a tenancy in common, your share of the property can go to your heirs after you die. It does not automatically transfer to the surviving owners, but you can leave it to anyone you designate in your will or pass it on to your legal heirs under estate law.

Drawbacks of tenancy in common

Even though tenancy in common has its advantages, as with every form of real estate investing, there are some downsides to consider. These include:

Absence of survivorship privileges

Since tenancy in common does not automatically transfer an owner's share to the surviving owners upon death, complications can arise. This is particularly true if the new heirs have plans for the property that is different from those of the remaining owners.

Potential for compelled property sales

When one owner wants to leave their share of a tenancy in common, they can initiate a partition action. This is a request for a court to intervene and decide how to handle the property.

The court might divide the property among the owners if possible, or if division isn’t feasible, it may order the property sold and the proceeds divided among owners according to their respective shares.

The partition action process makes sure that the departing owner can exit the arrangement, but it may force the remaining owners to either buy out the share or sell the property.

Equal obligation

In this common ownership arrangement, each owner's financial responsibility for costs like maintenance, insurance, and utilities typically corresponds to their share of ownership. Owners can customize their arrangements to decide how these expenses are shared.

Disagreements can happen if an owner fails to meet their financial commitments, leading to disputes among the co-owners.

Different ways to own property

There are other ways that people can share ownership of a property, such as:

Tenancy in severalty

This is when just one person or one corporation owns a property all by themselves. They have full control over it, and they don't have the complications that can come with having co-owners. This is the simplest form of property ownership.

Joint tenancy

In a joint tenancy, co-owners hold equal shares of the property and benefit from the right of survivorship. This means that if one joint tenant dies, their share automatically passes to the remaining tenants.

All co-owners must acquire their shares at the same time using the same deed or title.

Joint ownership is good for couples or family members who want to keep the property in the family if one owner dies. However, no owner can sell or transfer their share without the others' agreement.

Tenancy by entirety

This form of property ownership is available to married couples in some states and offers features similar to joint tenancy but with additional protections. Specifically, it protects the property from being targeted by creditors for debts owed by only one spouse.

Ownership of the property as a single legal entity means that creditors cannot force the sale of the property to settle individual debts. Additionally, one spouse cannot sell or transfer their interest without the consent of the other, guaranteeing joint decision-making.

How can you end a tenancy in common?

Tenancy in common is not a permanent arrangement, and there are several routes for exiting this type of shared ownership, including:

• Agreement: One of the simplest ways is through a common agreement among all co-owners. The co-owners can decide together to split the property or the money from selling it based on how much each person owns. 
• Death: If a co-owner dies, the other co-owners might choose to buy the share from the person who inherited it or share the property with them.
• Division through property distribution: In some cases, you can divide into separate parts, with each owner receiving a piece that matches their share.
• Division through property sale: Any owner can initiate selling the property. The co-owners then divide the proceeds from the sale based on their respective ownership share amounts.
• Sale of shares: You can sell part of the property to someone else, giving them all the rights and duties that come with it. 

How taxation works for a tenancy in common

Taxes are an important consideration with tenancy in common ownership. Here's how it works for property and income taxes:

• Individual taxpayer status: The IRS treats each owner as their own taxpayer, so property and income taxes are handled individually. Each owner receives their own property tax bill.
• Tax distribution: The legal arrangement determines how to split these taxes, typically based on each person's ownership interest in the property. For instance, if you own 30% of the property, you pay 30% of the property tax.
• Flexible arrangements: You can structure each ownership stake in a variety of ways. One owner might pay all the property tax, while others cover things like insurance or maintenance. However, you can only deduct the part of the property tax that matches your ownership share and how much you paid.
• Income taxes: Each owner reports and pays taxes on their share of rental income and expenses based on the amount of property they own.

To make sure all your bases are covered come tax time, we suggest looking into hiring an accountant for your rental property.

Exploring tenancy in common: Is it right for you?

Tenancy in common offers a unique approach to property ownership, providing flexibility in dividing ownership percentages and passing on shares. However, navigating this arrangement requires careful consideration. In any co-ownership scenario, open communication and clear agreements are paramount. Understanding each party's rights and responsibilities can pave the way for a positive experience.

So, is tenancy in common the right choice for you? The answer lies in your individual circumstances — your financial standing, long-term investment goals, and crucially, your ability to maintain harmony with your co-owners over time.

Tenancy in common can be a fruitful investment strategy, but it's not without its complexities. By weighing the pros and cons and ensuring everyone is on the same page, you can make an informed decision that aligns with your objectives.

Tenants in common FAQs

What is the difference between tenants by the entirety and tenants in common?

Tenants by the entirety is for married couples who own property together. In this arrangement, they have equal rights, and if one spouse dies, the other will inherit the entire property. They cannot sell the property without the approval of their spouse.

Tenants in common, on the other hand, are when two or more people who jointly own a property. They can sell or gift their share without needing approval from the other owners.

Which is better: joint tenants or tenants in common?

Generally speaking, joint tenancy is usually better for co-ownership. If one owner dies, their share automatically goes to the others. With tenants in common, when an owner dies, their share goes to their heirs, which can make managing the property more challenging.

What is the difference between rights of survivorship and tenants in common?

Rights of survivorship means that if one owner passes away, the other owner's share of the property will go to the other owner(s). This happens in joint tenancies but not in tenancies in common.