Let’s Play “TIC, TAC, TOE”!

Tenants In Common (TIC) is common in apartment ownership instead of C0-Opts or Condos, but is an available title ownership in any type of property regardless of size, type, zoning or use. These ownerships interests are also referred to as fractional ownership interests.

Why not form an LLC or partnership? These business entities are fine when the property is held strictly for business purposes, but in dealing with a homeowner who may live in a property they are not the best arrangement. Held in a business, the owner loses the ability to deduct interest on a home mortgage as well as the exemption of capital gains from their residence.

Another aspect is the availability of fractional financing under conventional loan guidelines, a TIC owner may sell and finance their interests as a conventional residence, like a condo loan, staying out of commercial lending requirements.

Unlike other joint tenancy forms of ownership, a TIC owner may leave their estate to chosen beneficiaries instead of other owners. They may sell or lease their interest without consent of other joint owners. They may also finance or refinance their interests held as just mentioned. That means that other strategies such a subject-to transactions, installment sales, leases and lease option to buy arrangements can be devised with TIC.

Holding legal and equitable title interests also means avoiding many of the pitfalls in other investor strategies. With a TIC agreement you’re not on the outside as you are with a master lease or a sandwich lease. Your sale under an option is no longer contingent on having your seller sell, you can pass title as an owner and execute the sales contract through escrow with your TIC partner or have the power to sell.

Wholesalers are no longer subject to license requirements facilitating a sale when they are holding legal and equitable title. Agents are much less exposed to claims of net listings or agency relationships being in title.

Need to get in and make improvements to a property but don’t have a contractor’s license? The TIC may be the answer, the owner is doing the work and contracting as required. Not only can you perform work on your property you can obtain permits required and hire contractors and sub-contractors.

Want to be a landlord? With TIC and your TIC Agreement, you become an owner and you can manage your property without a real estate license. You have an agreed buy out with your co-owner under your TIC Agreement, you take a management fee and split profits up to current rents, then retain the forced appreciation you create. Many ways to split a deal!

Why would an owner enter into a TIC Agreement selling just part of their property? Answer, it works for distressed properties, distressed owners, when an owner needs some money or steady income and would rather wash their hands of dealing with the property, like tired landlords. Another reason is taxes, the seller can string out the sale of interests in the property, still retaining tax benefits. They can also defer income gained over time. A seller can go from an active income to a passive income.

How safe is a TIC arrangement? Well, it can be safer than owning 100%! Creditors, even through bankruptcy have a much harder time seeking judgments against a fractional interest than a whole interest. That’s because the ownership rights of others cannot be impaired. You can be safer owning 10 properties with a 10% interest than one with 100% interest.

Can’t a majority owner just vote to change the TIC Agreement? No! The agreement can be made requiring all owners to consent to any change.

Can you buy an interest with seller financing? Absolutely, that’s how I do them! If you are buying from an occupant owner and you’re an investor, Dodd-Frank will not apply, same as if buying as an investor from another investor. The only way Dodd-Frank would apply is if you intend to move in to the property, even then you may have an exempt transaction buying from an owner occupant. The collateral pledge is simply your percentage of ownership.

How complicated is a TIC Agreement? Truth is, it can be very simple much like a purchase contract or a lease-option to purchase contract or it can be complex, it depends on your investment strategy and what you want to agree to. There are standard TIC Agreements available.

Can you use a Trust or a business entity to hold a fractional interest? Absolutely! Just understand with a business entity you may lose the benefits of property owned individually, like building permits or representing yourself in court. That’s a business decision.

What about the value of a fractional interest, will the price be the percentage of ownership taken with respect to the market value? You can agree to that, but the Tax Courts as well as Federal Courts have ruled that a fractional interest is less because it requires a law suit to force sale and administer a fractional interest. That is to value found through tax matters and law suits, actually an advantage to that owner. But, since the TIC Agreement can include power of sale provisions and agreements, the matter of forcing sale can be avoided. As to your net worth, after you acquire a fractional interest at cost, a year later you can show the fair market value as adjusted under the rules, always see your accountant.

What does TIC, TAC, TOE stand for? TIC, is tenants in common, “TAC” is taking administrative control under the TIC Agreement, “TOE” is taking equity under the TIC Agreement by your entrepreneurship. And, no, this is not guru stuff!

If you have any questions on the TIC, TAC, TOE, method just contact me!

10 Responses to Let’s Play “TIC, TAC, TOE”!

  • Profile photo of Paul doCampo
    Paul doCampo
    Great information! I am looking to buying my first buy and hold property (SFR 1-4) and I would love to know more on this to include in my tool box when dealing with distressed owners.
    • Profile photo of Bill Gulley,
      Bill Gulley,
      Sorry I'm late getting back Paul. The TIC Course is scheduled for next week. Be sure to join, I guarantee you'll learn more than most know! Thanks and keep learning! :)
      • Profile photo of Nicholas Vanarthos
        Nicholas Vanarthos
        Bill, How can I find out when/how to take the TIC course, and how much does it cost?
  • Profile photo of Phillip Tillotson
    Phillip Tillotson
    Paul, We are currently working on developing a course that will better explain this tactic. If you have any specific questions then feel free to ask away!
  • Profile photo of Bill Gulley,
    Bill Gulley,
    Hi Paul, (BTW, you're doing great in your course!) As mentioned, the course is under construction as they say. I will be adding more to the blogs as to the applications of TIC arrangements as well. Thank you for your interest, we're pretty excited to bring this unique strategy to individual investors. Bill
  • Profile photo of Jeremiah Jordan
    Jeremiah Jordan
    Great post. I've never heard of this before but my current enthusiasm for being able to deploy this tactic is sky high right now. Under a TIC agreement with a tired landlord would that person be forced to pay any depreciation recapture taxes? Also who would be writing off the depreciation on the taxes following the TIC agreement? I'll stop there but I could keep firing off questions. I am excited about that course and am enjoying the basics course right now. Thanks for the time you've put into the site. Looking forward to more.
    • Profile photo of Bill Gulley,
      Bill Gulley,
      Sorry, missed this one, taxes are on a prorated basis, and one owner may elect treatment or they may negotiate deductions but both can't take all the benefits, obviously.
  • Profile photo of Jeremiah Jordan
    Jeremiah Jordan
    Sorry one more quick question Bill. Is it possible to use a TIC agreement if there is currently a mortgage in place?
    • Profile photo of Bill Gulley,
      Bill Gulley,
      Yes, Jeremiah, lenders do not restrict the form of ownership elected by owners. The due on sale clause can apply but that matter can be well managed by changing the ownership for estate planning purposes. This will be discussed in-depth in the courses coming up.
  • Profile photo of Derek
    Derek
    Would it be to my benefit to become a real estate agent or at least take the course
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