What Is ‘Tenants in Common’ and Should I Arrange One?
“Tenants in common” may sound like a legal term rental property managers throw around, but it’s actually an important agreement between co-owners of real estate. It’s one type of arrangement that can come into play when multiple people decide to buy real estate together, be it a primary residence or a vacation home. The other common type of arrangement for multiple co-owners to buy real estate is called joint tenancy, also known as joint tenancy with right of survivorship.
For some people, buying real estate as co-owners with friends sounds ludicrous. You love your friends, but taking on a shared financial responsibility and a mortgage? No way! But others may see becoming co-owners as a real opportunity with a serious payoff, and could one day become party to a tenants-in-common or joint tenancy agreement.
What is ‘tenants in common’?
A tenants-in-common (TIC) agreement is a way to own a share of an entire property with a number of people, says Jeff Miller, a real estate agent and team lead at AE Home Group in Baltimore. (In a TIC agreement or joint tenancy, the owners are called “tenants.”)
Unlike a joint tenancy with right of survivorship agreement, a TIC agreement allows co-owners to own unequal shares of the same property and to pass on their ownership in the property to an heir when they die.
“For example, one owner may take responsibility for managing the property and in return receive a higher share of ownership,” Miller says. “It may also be the case that, after a number of years, someone sells part of his or her ownership to the other co-owners and maintains a smaller stake in the property.”
The TIC agreement provides a legal framework for the tenants to structure how the tenancy will operate, from deciding how co-owners should split the purchase price to choosing which co-owners make major decisions about the property. So while each tenant will own a share of the property and may have tenancy rights to live in and use the property, tenants pay their share of the mortgage, taxes, insurance, and maintenance costs based on the tenant’s share of ownership.
Advantages of a tenants-in-common agreement
Because a TIC agreement brings a number of tenants together to split costs and ownership, there can be a clear financial advantage for tenants who don’t have the means to buy property or qualify for a mortgage on their own. The flexibility of the tenants-in-common arrangement can be more attractive to prospective tenants who may plan to use real property for only part of the time (e.g., during the holidays or summer months) than being joint tenants. As TIC owners, they may opt for a smaller share in the real property, instead of equal shares.
This tenancy arrangement also allows the individual tenants to decide what happens to their ownership percentage of the property in the event that they die. Tenants in common can choose to sell their ownership share or transfer it to a spouse or other person, or to an heir after they are deceased.
A joint tenancy with right of survivorship, on the other hand, requires that the owners become joint tenants in the same deed or instrument at the same time. The joint tenancy survivorship agreement provides that when one joint tenant dies, the property interest of the deceased joint owner transfers to the remaining tenants, without going through probate. Joint tenancy is popular with married couples, because the tenancy of a deceased owner passes automatically to the surviving spouse.
Disadvantages of a tenants-in-common agreement
Of course the autonomy of co-ownership through TIC interests has its drawbacks says Michele Lerner, author of “Homebuying: Tough Times, First Time, Any Time.”
“At anytime, any owner can sell their share of the property or give it to someone else without requiring the consent of the other owners,” Lerner says. “This may result in you owning a house—and perhaps living there—with other tenants that you don’t know or don’t like.”
A tenants-in-common agreement, unlike joint ownership, does not automatically avoid probate.
Be smart when entering into a tenancy agreement
To help things run smoothly, experts advise getting everything regarding co-tenancy in writing, especially a tenants-in-common termination plan that all TIC owners are comfortable signing. Make sure you understand property law, and what will happen when a co-tenant wants to divest his ownership interest, or when he dies.
Miller suggests that a buy-sell agreement that’s backed by life insurance policies be part of that plan; it will give existing tenants the right to buy out a newly inherited tenant if one tenant dies. The buyout amount can be predetermined or the result of a third-party fair market value appraisal at the time of new ownership. The life insurance policy comes in handy in cases where the surviving tenants don’t have cash on hand for a buyout.
Whatever legal plans are drawn up, Lerner advises all tenants seek independent counsel from an estate attorney and a tax professional to walk them through both the legal process and the tax ramifications of purchasing a property in common.
“While owning a home with friends as tenants in common can be a great experience, it’s important to recognize purchasing property together makes the partnership more difficult to dissolve than simply renting a home with friends,” she says. “Professional advice is crucial to a successful agreement.”
The post What Is ‘Tenants in Common’ and Should I Arrange One? appeared first on Real Estate News & Insights | realtor.com®.
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