A tenancy in common is a popular way for co-owners to take title to a home. This way of vesting offers an alternative to joint tenancy, in which a home is co-owned, but the owners split their interests evenly. Here, we talk about what a tenancy in common is, and why its allowance for co-owning in unequal shares can be a benefit.
The Tenancy in Common: A Popular Choice for Co-Owners
When people acquire a property together, they should be ready to specify what form of vesting will appear on the deed. In some states, the tenancy in common is the default vesting mode for married couples. In some states, it’s the default mode for unmarried co-owners, so these owners become tenants in common unless they affirmatively pick another form of vesting.
Tenants in common can be a pair of owners or a group. They can be related to each other or unrelated. They can be spouses, siblings, partners, or friends.
When they decide to hold title to a home in a tenancy in common, can these co-owners divide ownership unequally? Can each co-owner pitch in for maintenance in different amounts?
On both counts, yes:
The co-owners need to state their specific share percentages. This is sometimes overlooked by title companies — but the co-owners should have their own plan. Equal shares might not be optimal. Each owner can hold any percentage of the whole, and the deed will show each co-owner’s ownership percentage.
Unless otherwise agreed, co-owners share expenses in proportion, too. When two or more people buy a house together, they’ll likely have different reasons and capacities for investing. We’ll take a look at some scenarios in the next section.
Do the co-owners need to inhabit the home together? Only if that’s the plan. No one, legally speaking, is allowed to keep any part of the home off-limits to the other co-owner(s). In other words, the co-owners, even if they hold unequal portions of the property, enjoy a right to of access to all of it. But they can buy a home together without any intention to physically share it.
Scenarios: Why Co-Buy
Many people decide to share equity in their homes. Payments and expenses can be collaborative investments.
Co-buying with a friend, business colleague, or sibling as tenants in common may help one or more of the co-buyers become homeowners. One owner might be on firmer financial ground than the other, and offer to be a co-buyer in order to help the other buy. The plan might involve refinancing later, in order to transfer the title into sole ownership, without the benefactor.
A lender may want the additional co-signer on the loan to be a co-owner, so the financially stronger person has a stake in the asset. In this case, the primary buyer will live in the house, pay for the house, make all mortgage and tax payments, and take full responsibility for repairs, homeowner’s association dues, landscaping, and so forth. “Owner B” will pay nothing, and is only in the tenancy in common to help “Owner A” buy and have real estate. “Owner B” may take the lower percentage of ownership the lender allows. Later, when “Owner A” achieves sole ownership, only the smaller portion needs to be conveyed from B to A, so the new sole owner will have a lower transfer tax.
These co-owners should think through every what-if scenario. What if “Owner B” passes away before the refinancing and transfer to sole ownership is complete? Did the co-owners create a legal agreement, explaining what should happen to the property if one co-owner dies during a temporary co-ownership? By default, the house will go into probate.
Another reason for co-buying with a small ownership percentage could involve a condo purchase. Condo properties generally limit the renting of units and restrict owner-investors to some extent. A tenancy in common with unequal interests can be a workaround for the investor—if the mortgage lender approves of the ownership disparity on the deed.
How the Mortgage Works for a Tenancy in Common
If co-owners are taking title without having to finance the home, their unequal ownership percentages are up to them. They could have 99% and 1% interests; they tenancy in common allows for it. But if the house is financed, a lender is unlikely to let one borrower have minimal rights to the asset’s value. The point of requiring co-owners is to have everyone on the loan share responsibility for paying it back.
Ultimately, the lender wants the option to claim the whole property in the event of default—thus, banks like co-signers to be co-owners. In reality, though, just one person might be paying the mortgage, and the other is on the deed in name only. “Owner B,” the Good Samaritan co-borrower, should be aware that no one is exempt from responsibility for paying off the mortgage and prepare for that unintended possibility.
Selling: What Happens When a Co-Owner Wants Out
When co-owners buy a home in a mutually beneficial agreement, they can later sell and divide the proceeds according to their share percentages. But tenants in common do not need to all be on board with selling at the same time. The co-owners in a tenancy in common:
Can sell or take a loan out against their own share.
Can sell their own interests in the property without the other owners’ consent.
Cannot sell the entire property (forcing the others to sell) without the others’ consent.
People can come into, as well as leave, the agreement. At any time, a new co-owner may come on board. At this time, the current group will need to convey their deed to the new, larger group—while leaving their original agreement intact.
Unmarried tenants in common must pay tax when selling the property in whole or in part. Yet owners who make capital gains from the sale are eligible to exclude up to $250,000 of that profit from income tax, if they meet the IRS requirements.
Last Wishes: What Happens When a Co-Owner Passes
A tenancy in common differs from a joint tenancy with rights of survivorship. Should one of the owners pass away during the tenancy in common, that property interest winds up in probate, in the deceased homeowner’s estate. Put in another way, tenants in common may leave their portions of the property to any beneficiaries they designate in their wills.
Upon any co-owner’s death, the living co-owners could wind up sharing ownership of the home with a beneficiary they do not know. This problem can be averted through a consultation with a wills and estates lawyer early in the process.
In short, co-owners:
Can pass their ownership shares to their named beneficiaries; and
Cannot automatically pass the right of survivorship when they pass away.
The Co-Ownership Agreement
It can be well worth the time to hammer out a co-ownership agreement so the owners agree on how they will behave in certain situations. If the state in which the home exists allows it, co-owners in the tenancy in common may forge a written agreement to let one co-owner live in the house exclusively. They can also allocate responsibility for repairs and expenses.
It helps to lay out in writing:
What percentages in ownership shares the co-owners hold.
Who will live in the house.
How the rooms will be allocated if more than one owner will live in the house.
Who is responsible for various up-front costs during the buying process.
Who will cover the monthly mortgage loan payments, insurance, association fees, taxes, and other normal expenses.
Who will handle other responsibilities desired by the group.
A date by which refinancing and title transfer must occur if, for example, one owner is expected to achieve improved financial footing and become the sole owner.
How the parties intend to bequeath their interests should one of them pass away.