Here’s How Tenancy in Common Works in Real Estate Investment
Do you want to buy a home, but can’t afford the closing costs, inspection fees, and downpayment on your own? Are you looking to sell an investment property and want to use a 1031 exchange to defer capital gains taxes?
Would you like to buy a second home, but need to pool your money with friends or relatives in order to swing it?
In all of these situations, a tenancy in common could help you reach your goals. A tenancy in common is a type of real estate ownership structure. Under a tenancy in common, you can split ownership of a piece of real estate with other owners.
You don’t have to own equal shares of the property, and if you want out of the arrangement, you can sell your share individually. Similarly, if you need to borrow money against your share of the property, you can take out your own mortgage on it.
And when you die, your share of your property will go to your heirs, not to your co-tenants in common. Here’s how it all works.
Setting Up a Tenancy in Common
A tenancy in common is typically set up at the time of purchase of a piece of real estate, although tenants in common can sell or borrow against their shares of the property at any time.
In some cases, like if you’re buying a house together with an unmarried partner, family members, or friends, lenders may want all of you to sign the mortgage documents at the same time.
All of your signatures on the paperwork mean that the bank can foreclose on the entire property, not just the portion owned by the tenant or tenants who signed the mortgage docs.
However, you don’t need to enter into a tenancy in common at the same time as everyone else, and in some cases, that’s not done. For example, if you want to buy some property as part of a 1031 exchange, you might choose to buy tenancy in common rights to a piece of institutional or commercial rental property.
In those circumstances, you might buy into a Delaware statutory trust and gain a share of a piece of commercial or institutional real estate, but you don’t need to sign your mortgage docs at the exact same time as the other tenants, nor assume liability for their loans on their shares of the property.
Dividing Shares of a Property
In a tenancy in common arrangement, tenants don’t need to get an equal share of the property. Let’s say you bought a vacation home with your two sisters, Jane and Jill.
You and Jill each put in 25 percent of the downpayment and closing costs. Jane puts in 50 percent. You all decide to split up the property according to how much you each paid, so Jane gets a 50 percent interest while you and Jill each get a 25 percent interest.
Later on, one of you could further divide your share to bring a fourth person into the tenancy in common. Or, Jane could buy you both out to dissolve the tenancy in common. Or, one of you could sell your share independently, effectively bringing a new tenant in.
When you own property as a tenant in common, you have the right to occupy and use the property. The other tenants can’t keep you out. In the example above, Jane and Jill couldn’t divide up the house into sections and say that each of you only gets to use their own rooms.
You would all three have the right to use all the rooms, and couldn’t stop each other from doing so. If one of you were to pass away, your share of the property would go to your heirs.
It wouldn’t go to the surviving tenants unless they happened to also be your heirs. However, in that situation, you’d be better off using a joint tenancy structure.
Dissolving a Tenancy in Common
While you can sell or borrow against your share of the property independently, if you and your co-tenants disagree on what to do with the property, now or in the future, one person could force a sale of the property. This is known as a partition sale.
You don’t necessarily need to go to court for this, but you can if you and your co-tenants can’t reach an agreement. The court will legally divide up the property so that you can each take your interest and move forward independently.
In the worst-case scenario, one tenant could force a sale of the whole property, and the proceeds would be split up according to each tenant’s ownership share.
A tenancy in common could be the answer if you want to invest in real estate but don’t have the money to buy an entire property.
You could split the costs with friends or relatives, or buy into something like a Delaware statutory trust that allows you to buy into investment property as a tenant in common.
It could be the easiest way to make your dreams of property investment come true.
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