What is a Tenants in Common (TIC)? And does your group need one?

What’s a TIC?

And no, we’re not talking about the bug. In the real estate world, TIC stands for tenancy-in-common (or tenants-in-common, or co-tenancy). It’s a legal agreement between two or more people to co-own a specific property without the right of survivorship. This means that if one owner were to pass away, ownership of the property would transfer via inheritance laws or Will rather than transferring to another co-owner. In general, group-owning a property as an LLC makes more sense, but there are a few circumstances where utilizing a TIC might be a better idea. However, since TIC laws differ for each state, it’s best to confer with an accountant or lawyer.

How does it work?

In simple terms, a TIC allows multiple parties to co-own a property. It allows sharing of revenue generated by said property, and sharing of property liability. However, the most notable aspect of a TIC agreement is the lack of right of survivorship. If one of the owning parties of a TIC dies for any reason, then their ownership is transferred according to inheritance law or Will, as opposed to being automatically passed over to a co-owning party. This is the main draw of entering into a TIC. Now, if an owning party were to decide to transfer their ownership, or sell, while still alive, then the entire agreement is dissolved.

Advantages

So, now that we know how a TIC works, let’s take a look at the reasons for joining one. Under a TIC, an owning party can freely sell or transfer their ownership whenever they want. This means that if you want to sell or transfer ownership, you can avoid having to first negotiate with the other owning parties. You’ll also be able to retain responsibility for your individual share of the mortgage and any applicable taxes, if that level of control is important to you.

Speaking of selling ownership, a TIC agreement also allows for the utilization of a 1031 exchange - which means you can avoid paying any capital gains taxes if you reinvest the proceeds of selling, into a new property of equal or greater value. And when it comes to buying, operating under a TIC will allow all parties to pool their resources together towards purchasing that dream property.

Disadvantages

There are a few pitfalls you’ll have to take into account when considering a TIC. For example, while the freedom TIC’s might offer can be attractive, it can also make things more complicated. Under a TIC, each owning party has the right to sell or transfer their ownership without the consent of the other owning parties. This means that, down the line, owners could potentially be stuck co-owning a property with strangers who may prove uncooperative. And since owners can change without the group’s consent, TICs could eventually have to navigate owners with conflicting goals for the property. Also, while each individual owner is responsible for handling their own property taxes, mortgage payments, or adding money to the reserve funds, the entire TIC would be liable if even just one owning party member were to miss a payment. To compound this issue, a single co-owner’s debtors could possibly force the sale of the entire property - though they wouldn’t be able to recoup a higher percentage of the sale than the percentage of the property said co-owner held. Throw in higher average lending costs (some lenders will even outright reject the prospect of a TIC) and you can begin to see why TICs can prove to be trickier than their worth.

When to use a TIC

Parties typically seek out a TIC agreement when buying a property with multiple units that can’t be sold separately. In these cases, you’ll have to buy a portion of the building in order to own a unit.

When an LLC is better

In many ways, operating as an LLC tends to be simpler and more streamlined. Among other things, this simplicity applies for tax purposes. An LLC is a taxable entity, where a TIC is not. With a TIC, each individual owning party will be taxed based upon their own income. Using an LLC’s can make the process of buying individual units within a property more streamlined. Rather than with a TIC, where buyers are purchasing ownership of individual units, an LLC requires buyers to purchase shares off the LLC itself. This means the LLC - a singular entity - still retains ownership of all units in a property.

And oftentimes, operating as an LLC will offer more protection than a TIC. With a TIC, individual parties can sell or transfer their ownership whenever they please - this could mean the complete dissolution of a TIC or it could mean that, in the future, you could be owning in partnership with strangers. The last thing you want is to get stuck with terrible co-owners.

Nestment, Inc. does not guarantee and is in no way responsible for the accuracy of information provided in this blog post. All information is provided “AS IS” and with all faults. Data presented here may not reflect all real estate activity in the market.  While the information on this site is about legal and tax issues, it is not intended as legal or tax advice or as a substitute for the particularized advice of your own attorney and tax professional.