tenancy in common (idea)
Return to tenancy in common (idea)
A tenancy in common is one of ye olde English common law mechanisms through which more than one person can own the same piece of real estate. Tenancy in common exists in most of the English-speaking world, but has recently gathered interest in the USA as an investment; more on that later.
How a tenancy in common works
Usually, when more than one person owns a single piece of property, they're either:
Under English common law, situation number 1 would be covered by a concept called tenancy by the entirety. In a tenancy by the entirety, both spouses "own" the entire property. Neither can transfer it without the consent of the other. Furthermore, if one spouse dies, the surviving spouse keeps the entire property.
Situation number 2 would either be covered by tenancy in common or joint tenancy. Joint tenancy is like tenancy by the entirety in that each of the joint tenants "owns" the entire property, and if one dies, the other(s) keep the entire property among themselves. If the property is sold (by mutual consent of the joint tenants), all of the joint tenants get an equal share of the proceeds.
Tenancy in common treats the property more like a corporation, where each owner has a certain share and can do anything they want to with that share (pursuant to any applicable contracts and laws). A tenant in common can sell their share to someone else, or leave their share to someone in their will.
England and a number of U.S. states recognize all three forms of tenancy. Some parts of the U.S. have abolished joint tenancy because of the problems that it creates, making tenancy in common the only way for unmarried people to directly own property together. (However, they could also incorporate, form a partnership or figure out another way to do so indirectly.)
"TICs" as an investment
Recently, many real estate investment gurus in America have been going on and on about "TICs" (pronounced like the bug), properties held by tenants in common as investment vehicles.
TICs are the contemporary grandchild of the tax shelters of the 1970s and 1980s: commercial real estate, large aircraft and other big-ticket items purchased by groups of investors with mortgages and then depreciated. The depreciation deductions, which each investor could individually claim if they organized as a limited partnership, would minimize (or sometimes even eliminate) the investors' income tax liabilities. Eventually, the IRS got wise to this practice and nullified its tax advantages.
Investors in a TIC can also claim depreciation deductions on their income taxes. When it comes time to sell the property, they can also put off their capital gains taxes by reinvesting the proceeds of the sale in a "1031 exchange"—that is, putting the money into another similar investment. And, of course, if the property is being rented out, the investor gets a share of the rent as well.
Many companies now make a business out of selling TIC shares like shares of stock: "how would you like to own five percent of the Empire State Building?" This practice began in Orange County, California, spread to other real estate havens like Florida, and has since found its way into just about every corner of the country.
One downside to a TIC is that it isn't a passive investment. The IRS requires TIC investors to spend a certain amount of time and effort "managing" the property during a year in order to claim tax deductions. Practically, this means that TIC investors have to visit the property during the year.
TICs are also not freely transferable; you can't sell a share of a building as easily as you can sell a share of Microsoft. This makes them mainly useful for long-term investment, not for "flipping" within a short period of time as many real estate investors can successfully do during boom periods.