What is tenancy in common?
Property ownership isn’t always as straightforward as you might think. Between liens, co-owners and creditors, ownership stake could be carved up any number of ways. Whether you're in the market to buy a new house or have lived in your home for several years, it’s always a good time to think about your property ownership options.
There are actually several different ownership frameworks that people typically use, one of which being tenancy in common. You may have heard this term before, particularly in relation to joint tenancy, but even if you haven’t, it’s good to bone up on the basics. That way, you’ll have all the insight you need to make an educated decision on the best approach to homeownership to meet your specific needs.
What does tenancy in common mean?
Tenancy in common is a form of property ownership in which multiple parties hold their own share of interest that they can manage separately from the group. Now, the number of tenants in common could be as little as two people — like a married couple — or many more than that. There’s no maximum limit on how many people can partake in a tenancy-in-common arrangement, but more tenants usually means smaller slices of ownership interest to go around. That’s not always the case, though, which we will discuss in a moment.
Tenants in common vs. joint tenancy
Joint tenancy, like tenants in common, involves two or more people sharing ownership of a piece of property. Where the two concepts diverge is when it comes to how ownership stakes are managed. Tenants in common enjoy a great deal of freedom making decisions about their interest in the property. If you were in this type of arrangement and wanted to sell your share of the property, you wouldn’t need to consult your co-tenants and get their approval first. That’s assuming your agreement doesn’t include specific terms giving other owners the right of first refusal, though. With joint tenancy, all parties would need to agree to any sale because ownership is managed as a whole rather than a collection of separate pools of interest.
Another key distinction is how property is divided among the co-tenants. Joint tenancy agreements split ownership stakes evenly among the co-tenants — so 50/50 with two people or 25/25/25/25 with four. That’s not necessarily the case with tenants in common. One person could own 50% interest while another person holds 30% and a third tenant has 20%. These divisions can even be broken down into decimal points, so a co-tenant could hypothetically hold 18.23% interest in the property.
The differences between tenancy in common and joint tenancy really come into focus when figuring out what to do with an owner’s share after they die. Under joint tenancy, the deceased’s ownership stake may automatically transfer to the other tenant. That’s if the joint tenancy agreement has right-of-survivor terms attached to it. Otherwise, those interest shares may be distributed among the deceased owner’s heirs, depending on the specific details of the contract.
Tenants in common can manage their own stake of interest any way they like, without needing to consult other owners. If you want your 50% share of a real estate property to transfer to your family members after you’re gone, you’d be well within your rights to set that up. Whichever route you’re considering, don’t forget to speak to a real estate attorney or estate planner who can give you sound legal advice.
What are your ownership rights and responsibilities as a tenant in common?
As a tenant in common, you’re entitled to certain rights, no matter how large or small your ownership stake is. Among the various ownership rights you’ll enjoy, these are the most noteworthy:
- You can access the property whenever you like, unless terms of the agreement say otherwise.
- You can sell or transfer your share of the property without consulting the other tenants.
- You can decide what happens to your share of the land after you die, whether it’s distributed among your co-tenants or passed on to your heirs.
- If the property is used for commercial purposes, you are entitled to a cut of the profits that is commensurate with your ownership stake. So, if you’re renting out your property to a third party, and you have a 25% claim of ownership, you would receive 25% of the rental profit.
At the same time, there are a few key responsibilities you’ll need to meet since you share ownership with the other tenants. Keep these obligations in mind when entering a tenancy-in-common agreement:
- You need to pay your share of the property costs, including the mortgage principal, interest, property taxes and homeowners insurance. Your share of these expenses is based on your ownership stake — if you own 50% of the property, you must cover 50% of the monthly housing costs.
- In some situations, tenants may be responsible for managing their own parcel of land. That could include units within an apartment building, for instance, or storage space. Typically, these types of arrangements apply to commercial real estate rather than homestead property.
- Your tenancy-in-common agreement may give other owners the right of first refusal on any sale or property transfer. In those cases, you would need to get your co-tenants’ approval before selling your stake in the property.
If you have any questions at all about your ownership rights as a tenant in common, consult a legal professional, like a real estate or estate planning attorney. They’ll be able to walk through the ramifications of a particular tenancy-in-common agreement.
Tenancy in common: Pros and cons
Owning property as a tenant in common can be beneficial for some people, while others may want to steer clear of it. Take a look at the pros and cons of this type of agreement to see if it’s right for you.
Pros
- You may receive full access to the property although you only own a fraction of it.
- You share the costs of property ownership, like the mortgage payment, homeowners insurance and property taxes.
- It’s easier to invest in real estate when pooling resources among multiple co-tenants.
- You can usually manage your slice of ownership interest any way you like, including deciding who to sell or pass on your stake to after you’re gone.
Cons
- You may wind up with co-tenants you didn’t ask for if another owner unilaterally sells their stake in the property.
- Creditors can place liens on a co-tenant’s share of the property if they fall into debt.
- Settling issues of property transfer and inheritance can be more complicated compared with joint tenancy with right of survivorship (JTWROS) since you’ll probably have to go through probate court.
- Co-tenants who fail to cover their share of the monthly mortgage payments can financially burden the other owners as well as create messy legal issues to deal with.
- Everyone needs to be in agreement before refinancing home loans to take advantage of lower interest rates.
As you can probably see, the merits of tenancy in common vary on a case-by-case basis. If you take away nothing else from this article, know that it’s essential you read the terms of your agreement closely.
In conclusion
Tenancy in common is a form of property ownership in which each stakeholder manages their own piece independently of everyone else. Property interest can be divided up any number of ways, and those ownership percentages will dictate how much you owe each month on your mortgage and other housing costs.
Is tenancy in common a good idea for everyone? In some cases — investing in real estate and buying a home in red-hot markets, for instance — this ownership arrangement makes it possible for people to purchase property that would otherwise be way beyond their budget. It may not make good sense in other scenarios, though, so think through the ramifications of tenancy in common before signing a legal agreement.
