Summary: Tenants in Common Overview
Tenant in common ownership, sometimes called a tenancy in common, is a method of holding title to property involving multiple owners
When a tenants in common arrangement is created, each individual owner, called a “co-tenant” or “co-owner,”owns an “undivided interest” in the property. There can be as many co-owners as required. Each co-owner of the tenancy in common has the right to use the whole property even though they do not own 100% of the property. The downside is if a tenant-co-owner decides to use 100% of the property it can create a problem with their fellow co-owners. There should be in place something in writing that defines how the commercial property is maintained among the co-owners and the obligations of each co-owner.
With a tenants in common the tenant can transfer their ownership in the property to someone else or if the co-owner passes away the ownership can covey to the surviving successor thru a will or to the owner’s heirs or heir. Compared with a joint tenancy, there is no right of ownership for the surviving heir or heirs.
When a co-tenant sells their property they sell the interest in the property. There a taxable gain or loss for the seller on a disposition of the property. A co-owner is treated as a distinct seller on a sale or other taxable disposition of the commonly owned property.
In the case of a partnership, the legal entity is treated as the transferor with the resulting tax liability being charged to the partners or members.If some partners want to sell their interests which is taxable versus partners what want to do a 1031 exchange. The advantage with a tenancy in common is each seller can elect to do what they want, cash out or reinvest in another property using a 1031 exchange.
In the event a co-owner decides to do a 1031 exchange, the same rules that apply to a fee owner are applied to the co-owner’s interest in the real property. A tenant in common ownership should not be confused with the scenario of a “TIC” or “DST” ownership which are have fractional ownership in commercial replacement property set up by a commercial real estate sponsor.