$113,520 per year that’s how much you need to earn to buy a home in 2024. This amount is 35% higher than the average annual U.S. household income. This significant increase has made homeownership increasingly challenging for many Americans. Co-owning a property is a feasible solution.
29% of U.S. consumers are open to co-buying a home. This arrangement is often structured through a tenancy in common agreement, where individuals co-own a property with family members, friends, or business partners. Co-owners also share the ownership rights and responsibilities of the property.
What Is Tenancy in Common?
Tenancy in common (TIC) is a legal arrangement with multiple property owners. All tenants have an equal or a different percentage of property ownership, based on their investment. Tenants can sell or transfer their ownership share independently of the other co-owners.
Co-owners can purchase properties together through TIC. The proportion of ownership possessed by each tenant also determines their share of the responsibilities and costs associated with the property, including maintenance, taxes, and renovations.
Tenancy in common arrangements is prevalent in certain areas, such as San Francisco, for multi-unit properties like apartment buildings or condominiums. In these cases, each tenant in common owns a percentage of the entire building, rather than a specific unit.
How Does Tenancy in Common Work?
Here is how tenancy in common agreement works:
1. Shared Responsibilities
The co-owners usually split the costs of taking care of the property and paying for utilities. This is based on how much of the property each person owns. But, the legal agreement can define other factors to divide the responsibilities, based on the discussion with tenants in common.
2. Making Decisions
The agreement will also explain how big decisions about the property will be made. This includes things like repairs, renovations, or selling the property.
Some agreements might say that most of the owners have to agree. Others might require everyone to agree. Having clear rules for making decisions helps prevent arguments and keeps things running smoothly.
3. Transferability
All tenants in common can sell or transfer their ownership percentage without seeking permission from co-owners. If a co-owner dies, their share is transferred to their legal heir instead of other co-owners.
4. Legal Considerations
When you decide to own a property with others as tenants in common, it’s important to have a legal agreement written by a lawyer. The agreement should clearly state the property ownership percentage of each tenant and their rights and responsibilities.
All co-owners have equal rights to access the property, irrespective of their ownership percentage. No member gets exclusive rights to use or occupy any physical portion of the property.
Example of Tenancy in Common
Let’s see an example to better understand how a tenancy in common works:
Imagine you buy a house with your two friends, Alex and Mark. The ownership structure is
- You – 50%
- Alex – 30%
- Mark – 20%
You hire a lawyer to draft a tenancy in a common agreement. It states each person’s ownership percentage and outlines their rights and responsibilities.
Rights and Responsibilities
As per the agreement, all three of you share the living spaces equally. You also split the mortgage payments, property taxes, and maintenance costs based on your ownership percentages.
A few years later, the roof starts leaking and needs to be replaced. The tenancy in common agreement states that any repair costing more than $5,000 requires approval from owners representing at least 70% of the property.
Since Alex and Mark, own 50% of the property, they cannot approve the repair. You, along with one another co-owner can approve the repair.
Changes in Ownership
After living in the house for several years, Mark decides to move out and sell his 20% share. As per the agreement, he has to offer his share to you and Alex first. If any of you decline, Mark can sell his share to someone else.
Dissolving the Agreement
A few years later, all the co-owners mutually decided to sell the property. You put the house on the market and find a buyer. Once the sale is complete, you can divide the proceeds based on the ownership percentages. With the property sold and the proceeds distributed, the tenancy in common is dissolved.
What Are Property Taxes Under Tenancy in Common?
Tenants in common receive a single property tax bill for the entire property. Most tax jurisdictions don’t divide the tax assessment based on each tenant’s ownership percentage.
Tenants in common are jointly and severally liable for the property taxes. This means each tenant could be held responsible for the entire tax bill, regardless of their ownership share.
For income tax purposes, tenants in common can deduct property taxes based on their ownership percentage. If you own 40% and paid $4,000 in property taxes, you could deduct $1,600 (40% of $4,000).
What Are the Different Ways to Co-Own a Property?
While tenancy in common is a popular option, it’s not the only way to co-own a property. Here are three more types of property ownership:
- Tenancy in Severalty (Sole Ownership): The property is owned by a single person or entity, with no co-owners.
- Joint Tenancy: In this arrangement, all tenants have equal ownership shares and equal rights to the property. If one tenant dies, their share automatically passes to the remaining tenants.
- Tenancy by Entirety: This type of co-ownership is only available to married couples in certain states like Florida, Tennessee, New York, and Vermont. Each spouse owns 100% of the property. It includes the right of survivorship and automatic transfer of ownership to the surviving spouse.
Tenancy in Common vs. Joint Tenancy vs. Tenancy by Entirety
Let’s understand the difference between joint tenants and tenants in common:
| Particulars | Tenancy in Common | Joint Tenancy | Tenancy by Entirety |
| Number of Owners | Two or more | Two or more | Two – husband and wife |
| Ownership Percentage | Can be equal or unequal | Equal | Equal |
| Transferability of Ownership | Freely Transferable without the consent of other co-owners | Needs other co-owners consent | Needs consent from the spouse |
| Right of Survivorship | Not available; interest passes on to heirs upon the death of a tenant | Available; interest passes on to other owners | Available; interest passes on to the remaining spouse |
Pros and Cons of Tenancy in Common
Like any co-ownership arrangement, tenancy in common has its advantages and drawbacks. Let’s have a look at these pros and cons:
Pros of Common Tenancy
- Reduces Cost Burden: It reduces the cost burden if you want to purchase a high-value property. Moreover, home warranty costs and property taxes are divided among the co-owners. This makes it easier to buy and maintain a property.
- Does Not Require Equal Investment: Tenancy in common allows co-owners to hold different ownership percentages. Hence, you can invest as per your financial ability.
- Equal Rights to Use the Property: All co-tenants have equal rights to possess and use the property, irrespective of their ownership. Even if you own 20% of the property, you have equal possession rights as the co-owner who holds 50% ownership.
Cons of Common Tenancy
- Enables Joint and Several Liability: All tenants are liable for debts and property taxes, regardless of their ownership share. This means that if one co-owner fails to pay the taxes, the remaining co-owners can be held liable.
- Poses Risk of Forced Sale: One tenant can force the sale of property, even if others disagree. This happens if one tenant wants to sell their share but is still looking for a suitable seller.
- No Right of Survivorship: There’s no automatic right of survivorship. It can lead to co-owning with strangers if someone inherits a tenant’s share outside the original group.
How to Dissolve a Tenancy in Common?
You can dissolve or terminate the co-ownership agreement in the following manner:
- Sale of Property: You can walk out of a tenancy in ownership agreement by selling your ownership percentage to other co-owners or an outside buyer.
- Partition of Property: If the tenants don’t want to co-own a property, they can make an application in court for partition of property in kind or sale. Partition in sale means selling the property and dividing the amount proportionately among all the tenants.
- Signing an Agreement: All co-owners can mutually decide to dissolve the tenancy in common by signing a quitclaim deed. This agreement releases tenants’ interest in the property.
Bottom Line
A tenancy in common offers flexibility and benefits for co-owning property, such as varying ownership percentages and the ability to pass shares to beneficiaries. However, it also has potential drawbacks, including joint liability and the risk of co-owning with strangers.
If you’re considering buying a new house and exploring co-ownership options, it’s essential to weigh your circumstances and goals carefully. Consult with a real estate attorney or professional to understand the implications of different arrangements and make an informed decision.
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Frequently Asked Questions
Joint Tenants vs. Tenants in Common: What's the Difference?
In a tenancy in common, each tenant can pass their share of the property to their designated beneficiary upon death. However, in a joint tenancy, the deceased tenant's share automatically passes to the remaining tenants as per the right of survivorship.
Can Tenants in Common Own Different Percentages of the Property?
Yes, when you own a property as tenants in common, each person can own a different amount of the property. For example, one person could own 50%, another could own 30%, and a third could own 20%. The ownership percentages don't have to be equal.
What Happens if One Tenant in Common Wants to Sell Their Share?
Any tenant in common can sell their ownership share to a third party without needing approval from the other tenants. This could result in co-owning the property with someone outside the original group.
Are Tenants in Common Jointly Responsible for Property Taxes and Debts?
Yes, tenants in common are jointly responsible for property taxes and debts. Co-own receive one tax bill for the whole property and are each responsible for the full amount, no matter how much they individually own.
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