Benefits & Risks Of Tenancies In Common

For the real estate investor who wants to defer capital gains taxes, a 1031 exchange is an appealing solution. But perhaps the same investor wants to move into larger, more lucrative parcels of real estate – the sort of investments he or she may not be able to make on their own.

Investing in a Tenancy in Common-structured investment may be one solution. Tenancy In Common (TIC) is a way for two or more individuals to have an undivided fractional ownership interest in a single property. With a TIC, each owner has individual rights and obligations related to the property. These rights equal the proportionate share of the owner’s interest.

Having an ownership interest in a TIC gives an investor the right to his or her proportionate share of net income, tax benefits and appreciation. The TIC owner is treated similarly to a fee simple owner and receives an individual property deed and title insurance for his or her share of the property. A TIC owner may bequeath his or her interest to any beneficiary upon the owner’s death.

Benefits

There are two main benefits to a TIC investment. One, it allows buyers to pool their resources and collectively acquire more purchasing power than if they pursued the investment on their own. This opens up a larger selection of properties, including those that will generate more income down the road. Two, a TIC gives every investor a say in the day-to-day operation of the property, something that is lost when an investor chooses an alternate joint ownership option (like a Delaware Statutory Trust).

Risks

One of the biggest risks of a TIC also flows from the fact that every investor has a say in day-to-day operations. This presents the possibility that the investors will disagree on major decisions. While many issues can be eventually sorted out, if a fast decision must be made (like a lucrative selling opportunity), the opportunity can dissolve before everyone reaches agreement. Also, since each owner’s personal credit worthiness is scrutinized by the lender in a TIC transaction, adverse information can negatively affect the TIC’s ability to refinance down the road.

To find out how we can help you find and close on your next 1031 exchange property or to learn more about the exchange process and our qualified intermediary services, please visit our website.