Definition
Tenancy In Common (TIC) is a form of property ownership in which two or more parties hold an undivided interest in the same property. Unlike joint tenancy, TIC owners hold separate and distinct shares, which can be unequal. Each owner has the right to use the entire property, and their interest can be sold, mortgaged, or bequeathed independently of the others. TIC is frequently used in investment property structures to enable tax-advantaged 1031 exchanges.
Examples
Example 1
Imagine four friends—Alice, Bob, Carol, and Dave—each invest in a residential property, holding unequal shares (e.g., Alice 40%, Bob 30%, Carol 20%, Dave 10%). Each owner has a right to occupy and use the entire property but holds their distinct share which they can independently transfer or sell.
Example 2
Tim sold his investment building and was under time pressure to complete a Section 1031 exchange. He discovered he could invest in a TIC, purchasing an undivided interest in a qualifying property that facilitated the tax-free exchange. However, Tim questioned whether the value of the TIC interest was equivalent to his previously owned property.
Frequently Asked Questions (FAQs)
Q1: What happens if one TIC owner wants to sell their share?
A: TIC owners have the right to sell their share without the consent of the other tenants. The new owner steps into the same undivided interest position.
Q2: How does TIC affect inheritance?
A: Unlike joint tenancy, TIC ownership allows each owner’s interest to be passed to heirs per their will or state law rather than automatically transferring to the surviving owners.
Q3: Can TIC owners force a sale of the property?
A: Yes, in some cases, if disputes arise or if an owner wants to liquidate their investment, they can file a partition action to compel the sale of the property.
Q4: How is liability managed in a TIC?
A: All TIC owners share liabilities proportionately to their ownership share. However, agreements can specify how costs are managed and responsibilities are distributed.
Q5: Does a TIC qualify for a 1031 Exchange?
A: Yes, owning a share of a TIC can qualify for a tax-deferred 1031 exchange, provided specific criteria are met.
Joint Tenancy
A form of property ownership in which two or more individuals hold equal shares and include rights of survivorship, meaning upon the death of one owner, their share passes to the remaining owners.
Section 1031 Exchange
A provision in the Internal Revenue Code that allows investors to defer capital gains taxes on real estate investments when they reinvest the proceeds in a similar property.
Partition Action
A legal procedure to force the sale or division of property held by more than one party, often used when co-owners cannot agree on the management or disposition of the property.
Online Resources
References
- “The Language of Real Estate” by John W. Reilly
- “Real Estate Principles” by Charles F. Floyd and Marcus T. Allen
Suggested Books
- “Real Estate Law” by Marianne M. Jennings
- “The Essentials of Real Estate Law” by Lynn T. Slossberg
- “Principles of Real Estate Practice” by Stephen Mettling, David Cusic
Real Estate Basics: Tenancy In Common (TIC) Fundamentals Quiz
### Does a TIC arrangement allow joint owners to possess different ownership percentages?
- [x] Yes, tenants in common can hold unequal ownership shares.
- [ ] No, all owners must have equal shares.
- [ ] Yes, but only with the consent of all joint owners.
- [ ] No, this only applies to joint tenancy agreements.
> **Explanation:** In a Tenancy In Common (TIC) arrangement, different owners can hold unequal ownership shares in the property.
### What happens to a TIC share when an owner dies?
- [x] The share is inherited by their heirs according to their will or state law.
- [ ] The share automatically transfers to the surviving owners.
- [ ] The share must be sold and divided among the remaining owners.
- [ ] It reverts back to the original seller.
> **Explanation:** In a Tenancy In Common (TIC), the deceased owner’s share is passed to their heirs per their will or state law, not to the remaining co-owners.
### Can a TIC owner unilaterally sell their share without the approval of other owners?
- [x] Yes, TIC owners can sell their share independently.
- [ ] No, all owners must agree to the sale.
- [ ] Only if stipulated in the TIC agreement.
- [ ] Only during a specific period each year.
> **Explanation:** TIC owners have the right to sell their individual shares without needing approval from other co-owners.
### Which form of co-ownership allows property to be passed directly to other owners upon death without going through probate?
- [ ] Tenancy In Common
- [ ] Tenancy by the Entirety
- [x] Joint Tenancy
- [ ] Life Estate
> **Explanation:** Joint Tenancy includes the right of survivorship, transferring the decedent's share directly to other joint owners, bypassing probate.
### What is the key advantage of TIC in terms of estate planning?
- [x] It permits individual allocation of shares to heirs.
- [ ] It avoids all legal entanglements.
- [ ] It simplifies tax obligations for all owners.
- [ ] It mandates equal property distribution among heirs.
> **Explanation:** TIC allows each owner to allocate their shared interest according to their will or state law, offering flexible estate planning.
### In a TIC structure used for a 1031 Exchange, which tax benefit is typically sought?
- [ ] Property tax reduction
- [ ] Long-term capital gains exemption
- [x] Deferral of capital gains tax
- [ ] Elimination of mortgage debt
> **Explanation:** A TIC structure can be used to defer capital gains tax on a property sale by reinvesting in another qualifying property under Section 1031.
### What action can a TIC owner take if they want to exit the ownership agreement and other owners refuse to sell the property?
- [x] File a partition action
- [ ] Force the other owners to buy them out
- [ ] Convert the TIC to a joint tenancy
- [ ] Petition local authorities
> **Explanation:** A TIC owner can file a partition action to force the sale or division of the property when unable to reach an agreement with other co-owners.
### What differentiates a TIC from a Joint Tenancy?
- [ ] TIC owners must include an operating agreement.
- [x] TIC does not include rights of survivorship.
- [ ] Joint Tenancy often involves more than two parties.
- [ ] TIC requires properties to be income-generating.
> **Explanation:** Unlike Joint Tenancy, TIC does not include rights of survivorship, meaning the shares of deceased owners can be inherited by their heirs.
### Which stipulation must be met for a 1031 exchange using a TIC structure?
- [x] The property must be like-kind and qualify under IRS regulations.
- [ ] The TIC must be held for at least five years.
- [ ] All TIC owners must have equal ownership shares.
- [ ] The exchange property must produce rental income.
> **Explanation:** For a 1031 exchange with a TIC, the property must be like-kind and meet IRS regulations, enabling deferral of capital gains taxes.
### Is it necessary to have a written agreement among TIC owners?
- [x] While not legally required, it is highly advisable.
- [ ] Yes, it is mandatory by law.
- [ ] No, verbal agreements are equally binding.
- [ ] Only if the property is used commercially.
> **Explanation:** Though not legally required, having a written agreement among TIC owners is highly recommended to outline terms and responsibilities and avoid conflicts.
