Tenants in Common: Definition and Explanation

Sharing ownership of a property with another party can be legally established in several ways. One popular option is to use tenancy in common. This allows you to own a portion of a property with someone else while retaining certain survivorship and liability protections. First, however, it is important to understand what tenancy in common offers, who it works best for and what to keep in mind along the way. Consider working with a financial advisor as you assess your options for sharing ownership.

What Is Tenancy in Common?

Tenancy in common is a form of joint ownership where two or more individuals own an equal or unequal share of a property. Tenants in common do not have to be married, (or even related, in order for the arrangement to be legal. This arrangement is available for both residential and commercial properties and may include buildings or tracts of land.

Tenants in common can divide the property’s ownership into whatever percentages they like. They can maintain equal shares, with each retaining one-half of property ownership, or they can divide it into any combination of shares. 

A tenancy in common contract can be created at any time, unlike a tenancy by the entirety that is created at time of purchase. Instead, these contracts can be changed, sold, borrowed against or even divided further after they are created.

The individual terms for a tenancy in common contract will be outlined in the property’s deed or title. Owners may also choose to draw up a unique property contract, which includes the specific terms each party has agreed upon.

Why Tenants in Common Are Used

A tenancy in common arrangement allows multiple individuals to share an ownership interest in a property while accounting for separate interests. Here are three instances where it may apply:

• A married couple holds a property in tenancy by the entirety but then divorces. The property can still be jointly held by shifting into tenancy in common, allowing each former spouse to determine their own beneficiaries and wishes for the property.
• A couple buys a house together, but one spouse pays a significantly larger portion of the purchase price. With tenancy in common, the spouses can account for an unequal ownership interest in the property, greatly simplifying matters if they later split up and need to reconcile their contributions.
• Two or more unrelated individuals purchase a property together, using a tenancy in common to protect each owner’s stake in the property. This ensures that the heirs of each owner will receive their share of the property after they die, instead of passing to the other owner(s), which is a process known as survivorship.

What Happens When a Tenant in Common Dies?

Perhaps one of the most important aspects of tenancy in common ownership is how the property is transferred upon the death of an owner. 

When a tenant in common dies, their share of the property will be passed on to their own beneficiaries or named heirs as part of their overall estate planning. The other property shares remain with the other tenants in common.

Property held and passed down by tenants in common will likely need to pass through the probate courts. That share of ownership in the property becomes part of the deceased owner’s overall estate. It will then be distributed to heirs, according to their will.

Each estate situation is unique, but the probate process is generally lengthy and costly, which is why owners should carefully consider the drawbacks before opting for a tenancy in common designation.

Tenancy in Common vs. Two Alternatives

There are many different legal structures to choose from when owning property with others. Three of the most popular include joint tenancy, tenancy in common and tenancy by the entirety.

All three types let more than one person own a property at the same time, but the rules are different. It’s important that everyone involved knows exactly how each option works before choosing one.

Risks and Considerations of Tenancy in Common

Tenancy in common offers flexibility, but it also comes with risks that owners must consider before entering into this arrangement. 

One key issue is that each co-owner has the right to sell, transfer or mortgage their share of the property without the consent of the other owners. This means you could unexpectedly find yourself sharing ownership with a new co-owner, such as a stranger, a creditor or even an ex-spouse if one of the original owners ends up in divorce.

Another risk is liability for expenses. All tenants in common are responsible for costs associated with the property, including taxes, insurance and maintenance. If one owner fails to pay their share, the other owners may have to cover the shortfall to avoid liens, foreclosure or lapses in coverage. This can create financial strain if the property requires ongoing upkeep or carries a mortgage.

Conflicts between co-owners can also complicate property management. For example, disagreements about whether to sell, rent or renovate a property can leave the arrangement at a standstill. 

In extreme cases, one owner may file a partition action in court, which can force the sale of the property so proceeds can be divided among the owners. This type of court-ordered sale may sell for less than the property’s true market value, reducing the return for everyone involved.

Due to these risks, many tenants in common create a written co-ownership agreement to finalize the arrangement. This document outlines each owner’s financial obligations, while also setting rules for establishing procedures for resolving disputes and buying out a co-owner’s share. 

Taking the time to draft such an agreement can help protect each owner’s investment and reduce uncertainty about how the property will be managed over time.

Bottom Line

Owning property with others can get complicated, especially if you want to protect your share. Tenancy in common lets two or more people own a property together, even with unequal shares. It also allows each person’s share to pass directly to their heirs if they die, which can help protect individual ownership and make estate planning easier.

Tips on Estate Planning

• Estate planning involves many legal and financial details, so working with a financial advisor can help you avoid costly mistakes. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• It’s important to understand what’s in your nest egg. Using a free retirement calculator is a good way to get a quick estimate of that.

Photo credit: ©iStock.com/kali9, ©iStock.com/gmnicholas, ©iStock.com/Ridofranz