Are you thinking about buying property with someone? If so, you need to understand the two main ways that people buy property together: joint tenancy and tenancy in common (TIC). While both types of arrangements allow multiple parties to own interests in the same undivided piece of real property, they’re different types of arrangements and they’re typically used for different things.
For example, joint tenancy is usually used by married couples or cohabiting partners who both want an equal share in the property and want to be able to inherit the other tenant’s share if he or she dies. Tenancy in common, on the other hand, allows two or more people to own equal or unequal shares in a property, with full rights to sell their shares or pass them on to their own heirs – not the other co-tenants. Let’s take a closer look at some of the differences between these two common types of property ownership.
In a joint tenancy, two or more people own equal shares in a property. Joint tenancies are typically entered into by married couples buying property, such as a shared family home. Each partner would own 50 percent of the property. If they were a throuple and wanted to split the joint tenancy three ways, then each partner would own a third of the property. It doesn’t really matter how many joint tenants are involved, but they must come into ownership of the property at the same time, when title is taken. Joint tenants cannot enter into the tenancy agreement at a later time.
If a joint tenant dies, his or her share of the property automatically goes to the other joint tenant (or joint tenants, as it were). So, if a married couple owns a house as joint tenants, and then one of the partners dies, the other would automatically inherit full ownership of the house – it wouldn’t have to go through probate and it would not be subject to estate taxes. However, when the second partner dies and the marital home is passed down to the couple’s children, they will have to pay estate taxes.
Joint tenancy is a good option if your concern is to keep property within your family or to make sure your partner is provided for if you die. But tenancy in common can be a good option if you want an investment property but can’t afford it all by yourself. The most traditional form of a TIC is when close friends, family members, or business partners pitch in together to buy a piece of investment property or a vacation home. You can also use a 1031 exchange to become tenants in common of a commercial-grade investment property.
As a tenant in common, you can take ownership of a share of property at any time, not just when the TIC agreement is created. Shares don’t have to be equal – they could be split up in any way that works for the co-tenants. You have full control over your share of the property, and you can sell it to whoever you want, whenever you want, without consulting the other co-tenants (unless you’re obligated to do so by the co-tenancy agreement). You can even get your own mortgage on your share of the property.
Probably the most important difference between a TIC and a joint tenancy is that when a co-tenant in a TIC dies, his or share doesn’t pass on to the other co-tenants. It goes down to his or her heirs, as designated by his or her will, or by the laws of intestacy in his or her state if there is no will. That means you can leave your share of the property to your children, spouse, or other heirs as you see fit.
However, when you own a share of a TIC, especially when you know the other co-tenants, a lot depends on getting along and having a shared vision for the property. Co-tenants can’t exclude you from the property, but if you can’t agree on what the property should be used for, you could run into trouble. One co-tenant can even force you to buy them out or force the sale of the property if they want to cash out their share.
Tenancy in common and joint tenancy are two means of sharing property ownership that have different purposes. Joint tenancy is most often used between spouses to make sure both partners’ interests in jointly held property are respected. TIC is usually used to pool resources to buy an investment property. Choose the right structure for your property purchase, and grow your wealth and that of your family.