Real Estate Tax Tips: Owning Property as a Tenancy in Common
"Tenancy in common" (or TIC) refers to a situation in which ownership of a piece of property is divided among multiple people. When the owners of a piece of real estate have a tenancy in common, it can create a number of complications related to taxes.
Tenancy in common vs. joint tenancy
When a piece of real estate has multiple owners, the ownership is usually held either in joint tenancy or tenancy in common. The key differences are:
- With joint tenancy, each owner has an equal interest in the property.
- With tenancy in common, owners can have different amounts of ownership; for example, ownership could be split among three people in shares of 15%, 40% and 45%.
- Joint tenancy has a right of survivorship, meaning that when one owner dies, that person's share automatically goes to the other owners.
- In tenancy in common, a deceased owner's share goes to his or her heirs.
- A property held in joint tenancy cannot be sold, given away, mortgaged or transferred to someone else without the permission of all the other owners.
- In tenancy in common, each owner can sell, give away, transfer or mortgage his or her share of ownership to anyone else.
Assessing property taxes
When it comes to real estate taxes on a tenancy-in-common, or "TIC," property, it's important to understand that a TIC does not subdivide a property. The property remains a single unit in the eyes of the law; tenancy in common is merely an agreement among the owners about how they own that single property.
Typically, real estate taxes will be assessed on the property, and all owners listed on the deed are legally responsible for the full amount of the tax. How owners collect and pay the tax among themselves is up to them.
Any tenancy-in-common agreement should clearly spell out the responsibilities for paying property taxes for each owner, as well as other expenses.
Real-estate-related tax deductions
For the most part, the IRS doesn't get involved in determining exactly who owns a particular property and doesn't determine who is entitled to the tax breaks associated with property ownership, such as deductions for property taxes paid and mortgage interest paid. The federal tax code simply describes the benefits available to property owners and defers to state and local laws that define legal ownership of property.
For tenancy in common, this means that if the legal ownership of a property is recognized as, say, a three-way split of 40%, 35% and 25%, the owners would be eligible for deductions of 40%, 35% and 25% of the property tax paid.
However, if the TIC agreement among the owners (which would be executed under local law) specifically identifies a different allocation of property taxes, then that's what dictates what owners can claim on their tax returns.
Taking the mortgage interest deduction
If an owner of a TIC property has a mortgage that applies only to his or her share of the property, taking a tax deduction for mortgage interest is pretty straightforward: The lender sends that owner a copy of Form 1098 saying how much interest was paid on the loan, and the owner reports it on his or her tax return.
It's common, though, for TIC owners to have a single mortgage. It may even be the case that not all of the owners' names are on the mortgage. In single-mortgage situations, lenders often send a 1098 only to the first owner listed on the mortgage, using that person's Social Security number.
The IRS will have a record of that person paying all the mortgage interest. All owners can still claim their respective shares of the mortgage interest, but they must take several steps:
- The owner whose name is on the 1098 reports their share on Schedule A on the line for "Home mortgage interest ... reported on Form 1098."
- The other owners report their shares on Schedule A on the line for "Home mortgage interest not reported to you on Form 1098."
- The other owners also attach a statement to their returns with the name, address and Social Security number of the owner who received the 1098.
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