Tenants in common is a way for two or more parties to buy a property or parcel of land. Buying real estate is expensive, and pooling your resources with others can be a great way to bring the price within reach and potentially lower your mortgage payment. Perhaps you are buying a house with relatives that you’ll live in and that they will stay in when they are in town. Or maybe you’re eyeing the purchase of several acres of land with some colleagues as an investment.
These are examples of why it may make sense for you to join forces with someone else (or multiple people) when acquiring a property. It can, however, open up a number of other questions and issues.
If you’re buying any kind of property with another person, even family, then you’ll need to consider how you want to co-own or take title to it. Tenants in common is one way to take title to a property.
Taking title as tenants in common first became popular in the 1980s in cities where the price of real estate had increased steeply. Acquiring properties in this manner has grown in popularity, especially in expensive urban areas, where merging money from different individuals became a way to increase purchasing power.
Read on to learn more about tenancy in common, including what is tenancy in common, how it works, and what are the pros and cons of tenancy in common.
Key Points
• Tenancy in common allows multiple people to jointly own property.
• Each tenant owns a percentage of the property, which can be unequal, and has rights to the entire property.
• Tenants can independently sell or transfer their share, potentially leading to co-ownership with unknown parties.
• The arrangement offers flexibility, such as adding new tenants or naming beneficiaries, but includes risks like shared mortgage liability.
• TIC differs from joint tenancy and it is important to understand the difference.
What Is Tenancy In Common (TIC)?
Tenancy in common, also known sometimes as “tenants in common,” is a way for multiple people (2 or more) to hold title to a property. Each person owns a percentage of the property, but they are not limited to a certain space on the property.
In other words, you might be tenants in common with one or more persons, each holding a percentage of ownership share (which does not have to be equal), but you have a right to the entire property. There’s no limit to how many people can be tenants in common.
Worth noting: Despite the use of the word “tenant,” tenants in common has nothing to do with renting.
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How Tenancy in Common (TIC) Works
Tenancy in common works by people pooling their resources and buying property together. Each tenant, or person who is part of this legal arrangement, may own a different percentage of the real estate, but that doesn’t limit you to, say, just one room of a house.
The TIC relationship can be updated, with new tenants being added. What’s more, each tenant can sell or get a mortgage against their share of the property as they see fit. Each tenant may also name a beneficiary (or beneficiaries) to inherit their share upon their death.
If a group of tenants in common decides to dissolve the TIC agreement, one or more of the tenants can buy out the other tenants. Or the property can be sold and the proceeds split per the ownership percentages.
Property Taxes With Tenancy in Common
You may be wondering how tenants pay taxes on TIC properties. In most cases, a single tax bill will turn up, regardless of how many co-owners are involved or how they have divvied up percentages of ownership. It is then up to the tenants to determine who pays how much.
Another facet of tenancy in common arrangements to consider: Tenants can deduct property taxes when filing with the IRS. A common tax strategy is for each member to pay property taxes equal to the percentage of their ownership and then to deduct what they pay.
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Tenancy in Common vs Joint Tenancy
When it comes to shared ownership, tenancy in common isn’t the only option. Another way to handle a shared purchase is joint tenancy. Here are some points of comparison for a tenant in common vs. joint tenant:
• In TIC, the tenants can divide up ownership of property how they see fit. In a joint tenancy, the tenants hold equal shares of a single deed.
• With a TIC arrangement, when an owner dies, their portion of the property passes to their estate. With joint tenancy, however, the property’s title would go to the surviving owner(s).
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Marriage and Property Ownership
Tenancy in common and joint tenancy are often ways that property is held in marriage. This will vary depending on the state you live in. Some states consider TIC the default way to own property in marriage. Elsewhere, it may be joint tenancy.
There is one other option possible, known as tenants by entirety (TBE). In this case, it’s as if the property is owned by one entity (the married couple) in the eyes of the law. Each spouse is a full owner of the real estate.
As with most things in life, there are pros and cons to TIC arrangements. First, the benefits:
• With the high cost of real estate, especially in expensive markets, taking title as tenants in common can be one way to pool money and buy property you couldn’t otherwise own as an individual. It’s a way to bring home affordability into range.
• Because tenants in common also allows for flexibility in terms of how you work out the specifics of living arrangements, it lends itself well to situations where friends decide to go in together on a vacation home or property where they won’t all be occupying the property at the same time.
• You can transfer your share at any time without the consent or approval of the other tenants. You also have the right to mortgage, transfer, or assign your interest and so do your partners.
Now, for the disadvantages:
• Tenants can decide to sell or give away their ownership rights, without the consent of the others, which means you might end up co-owning a property with someone you don’t know or even like.
• In terms of real estate law, one of the main issues with a tenancy in common is that if you all signed the mortgage loan in order to purchase the property, you could end up being liable for someone else not paying their portion of the mortgage or for creditors forcing a sale or foreclosure of the entire property.
Increasingly, though, some banks and lenders are offering fractional loans for tenants in common on real estate that is easier to divide into separate units. This then allows each tenant to sign their own loan tied just to their percentage of the property. A mortgage calculator can help you figure out what your payments might look like.
Example of Tenancy in Common
Here’s an example of how tenancy in common might look in real life: Sam wants to buy a condo in Florida for $300,000 but can’t afford to do so; his limit is $200,000. His sister Emma loves Florida and says she would like to go in on the condo if she can spend a couple of months there in the winter. She adds her $100,000, and together, they can afford the condo. They pool their resources and make a down payment of 20% on the $300,000 property. After reading up on mortgage basics, they decide Sam will take out the mortgage. The mortgage principal on the purchase is $240,000.
Sam owns two-thirds and Emma owns one-third and Emma pays Sam for one-third of the cost of the mortgage, property taxes, and homeowners association dues. They both have the right to occupy the property. If Emma decides that she wants to get her own place in Florida, she could sell her share in the condo, while Sam retains his interest.
The Takeaway
Buying a house can seem overwhelming, but it doesn’t have to be. Tenancy in common presents one avenue to affordable ownership by allowing you to purchase property with others. Another way to manage costs is to get the best possible mortgage to suit your needs and budget.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
Can tenancy in common be dissolved?
A tenancy in common can be dissolved. A single or multiple tenants may agree to end the arrangement by buying out the others in the shared ownership. If there is a situation in which the tenants can not agree on a path forward, the courts can be involved.
What are the responsibilities of tenants in common?
In a tenancy in common relationship, each tenant must pay their share of the costs involved, which can involve the mortgage principal and interest, homeowners insurance, and property taxes. A tenant’s share of these costs will reflect how much of the property they own. In addition, you may need to manage a portion of the property (say, if you’ve divided a house up or own a plot of land with others). Lastly, a TIC agreement may involve rights of first refusal if any tenants want to sell their share.
What happens when a tenant dies?
When a tenant in a tenants in common agreement dies, their share of the property is passed along to their beneficiary or beneficiaries; it does not automatically go to the other tenants.
What are the disadvantages of tenants in common?
Typically, the most important disadvantages of a tenants in common agreement are: Each member can sell their share independently, meaning you could be stuck with a tenant you don’t know or like; the TIC could be dissolved by tenants buying out one another; and if the tenants cosigned a mortgage for the property and one or more don’t pay, the other tenant could be stuck with liability for additional costs.
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