A tenancy-in-common, or a TIC for short, is just one tool available to a real estate investor. However, make sure to check with an in-state attorney or tax adviser. This is one tool that varies from state to state in application. A TIC is often used for tax purposes.
Co-Tenancy and the Basics of a TIC
A TIC starts off with the basic principle of a co-tenancy. When two or more people own a piece of real estate, they have a co-tenancy. Unless an agreement says otherwise, co-owners of a co-tenancy each have a right to access the entire property, share in the income generated from the property (i.e. rental income and sales proceeds) and has a duty to share in the expenses related to the property. Co-owners don’t always have to share in the costs of improvements. However, if one owner makes improvements at their own expense, and the improvements increase the property’s value at sale, the owner may be able to recover their contribution.
A TIC is a form of a co-tenancy. Each owner, whether entities or individuals, has an interest in a single TIC. Usually this is evidenced by an agreement. The primary characteristics of a TIC are:
- Each owner holds a separate and undivided interest in the property;
- Each owner may have a different ownership percentage in the property;
- There are no survivorship rights among the co-owners (i.e. when one owner dies, their interest doesn’t automatically transfer to the others, unless it’s by agreement); and
- Generally, the owners may transfer or encumber their interest without the consent of the other (unless otherwise required by the TIC agreement, lender or other party or agreement).
Formation of a TIC
In order to create a legal TIC in the property, all of the owners must take title to the property, with the deed taking into account the ownership percentage of each property owner. While you don’t have to form a TIC agreement before the owners take ownership of the property, it’s a smart move. Your TIC is subject to statutes and common law without an agreement, which may not be favorable to you. Creating your own agreement also allows you to pick and choose your own terms, subject to applicable laws. You can also add owners down the road.
A TIC can also be created when a joint tenancy with a right of survivorship is severed. Joint tenancies are most often found between husbands and wives, parents and children and other similar groups where property rights pass in the event of death. It operates to pass the deceased owner’s interest to the surviving owner (i.e. from a parent to a child or children or a spouse to another spouse) upon death. TICs themselves have no right of survivorship. Unlike joint tenancies, owners in a TIC are not required to own equal shares. A joint tenancy is converted into a TIC if a joint tenant sells or mortgages their interest without the consent of the other joint tenant.
The TIC Agreement
For real estate investors, a TIC agreement is often very important. It sets forth the management, ownership interests, profit interests, distributions, responsibilities among the owners and management, and a host of other terms, so that the owners can make their own terms without having to completely be at the mercy of statutes and common law. The primary purpose of the TIC agreement is to set forth the rights and duties of the owners, management and other parties who have an interest in the property, settle potential issues and disputes ahead of time, protect the owners and provide procedures for when conflicts arise.
TIC agreements generally set forth the following:
- Management – A TIC agreement often provides for who will manage the property and what responsibilities they will have. Management is often provided by one or more of the owners, but it can also be a third party.
- Assignment of Usage – A TIC agreement can describe specific uses and rights that the owners may have to the property. All owners can have equal use of, or access to, the property, but you may want to limit the use or access of one or more of the owners, depending on the plans for the specific property.
- Determination of Ownership Share – A basic TIC agreement at a minimum generally describes the method by which each owner’s ownership is determined.
- Permitted Uses – A TIC agreement can limit, permit or restrict certain uses on a property. This can include such things as limitations on the number of people who can live on, or be present at, the property at any one time, specific uses that are allowed on the property and restrictions on certain animals or fixtures on the property.
- Maintenance – A TIC agreement can describe who will be responsible for maintenance of the property, including common areas, buildings, landscaping, etc.
- Expenses and Improvements – The TIC agreement can detail how expenses and property improvements will be paid for and who will pay the expenses and fund the costs of improvements.
Of course, the above is by no means an exhaustive list. A TIC agreement can have a host of terms and provisions not included above. The most important thing about a TIC is that it is a great tool to use for some IRS Code §1031 tax-deferred transactions, depending on your property investment interests and structure. Feel free to give Dodson Legal Group a call for a consultation if a TIC sounds right for your investment at 844-4DODSON.