What if a tenant in common wants to sell?
Tenancy in common is not an uncommon way for more than one person or commercial entities to own a single piece of property. It is distinct from joint ownership, which is the condition in which most married spouses hold their property titles. Tenancy in common conveys special rights and responsibilities to the partial owners, which can eventually create conflicts when one party wants to sell.
Tenancy in common is a situation in which title to a property is owned by more than one person. Unlike joint tenancy in which the property is evenly divided, tenancy-in-common owners can divide the ownership into as many unequal parts as they choose. Each partial owner under tenancy in common has the same rights to access and occupy the property as any other owner, regardless of his per cent ownership stake. Each is responsible for his per cent share of the property's liabilities, including taxes. If the property generates income, such as through rent, each partial owner gets a share of the income equal to his per cent ownership.
Another important difference between joint ownership and tenancy in common is the issue of survivorship. When property is jointly owned, the share of a deceased owner automatically conveys to the surviving owner(s). Under tenancy in common, a decedent’s ownership interest can be willed to a beneficiary, who might or might not already be a tenant in common to the property. This situation, which injects a new owner with full rights of access, often gives rise to most disputes regarding tenancy in common sales.
The fact that each stakeholder in a tenancy in common title has full access to the property makes it challenging for minority shareholders to sell their interest. There’s simply little incentive for a buyer to get involved in such an arrangement unless the property is generating significant income. A common solution is for one of the owners to buy out the stakes of the others. If the owners cannot reach an agreement, one party can file a partition action and get a court order to sell the property. When a tenancy-in-common property is sold, the proceeds are divided according to the per cent ownership of each tenant.
Another way around the partial ownership interest of tenancy in common is via a 1031 exchange (see Resources). Section 1031 of the Internal Revenue Code allows sellers of property to defer capital gains tax on the sale if they reinvest 100 per cent of the proceeds in property of like kind. For purposes of the IRS, all real estate in the United States, developed or undeveloped, is like-kind property (see Resources). A partial interest in property held under tenancy in common can be sold for an interest in other property through a 1031 exchange. This way, a majority stakeholder can avoid having to bear the burden of the capital gains liability of a forced sale, and/or a minority owner can sell her interest in an income-producing property and swap up to a better quality investment without creating a capital gain.
To effectuate a 1031 exchange, the seller can find a buyer who owns property, and the two can decide to swap. That’s a pretty unlikely scenario, though. Almost all 1031 exchanges occur through a qualified intermediary who arranges first for the sale of the tenancy in common interest and then for the purchase of a new property within a limited time period. The new property must be identified within 45 days of the closing of the initial sale and be complete within 180 days of the closing. The sellers only transact with the intermediary and receive like-property in exchange for their interest, instead of cash, and are, therefore, not subject to capital gains tax (though their basis remains the same when they ultimately resell the new property).