Wednesday, May 7, 2014

TENANTS-IN-COMMON…TO BE OR NOT TO BE

Over the years I have had lots of experience with the tenant-in-common form of property ownership.  In case you are unfamiliar with this form of ownership; it is where multiple owners share a percentage ownership in one property.  Each owner has a fractional undivided ownership interest.  No one owner can make decisions for the other owners unless they have an operating agreement between them that allows one person to make decisions for all of the owners, and this kind of operating agreement may cause the arrangement to be classified as a partnership.  The primary reason for tenancy-in-common ownership is to facilitate making a tax deferred exchange of one property for another property.  A more common form of ownership of property by multiple people would be in the form of a partnership or LLC, but property owned by a partnership (or LLC) can only qualify for tax deferred exchange treatment if all the partners want to make the exchange.  Therefore, tenant-in-common ownership is chosen so that each owner can separately decide whether to do a tax deferred exchange.

The main problem with tenant- in-common ownership is the lack of control by any one owner.  I have seen many tenant-in-common arrangements go bad when major management decisions need to be made but there is no good way to get the various owners together on the decisions.  Often these decisions are time sensitive and tenant-in-common arrangements tend to make owner communications slow, and do not give the majority of owners the right to force a minority to make a decision that they do not agree with.  The result is often that no decision is made and the property loses value or cash flow because of the lack of action. 

One of the things that I try to help clients do, is to look at the real dollars of tax postponed by a tax deferred exchange, and think hard about whether the deferral of tax dollars really offsets the lack of control in a tenant-in-common arrangement.  Sometimes people put too much importance on the ability to postpone some tax.  Tax deferred exchanges are not always the best choice, for many reasons.  When one of the conditions necessitated by a tax deferred exchange is the ownership of the property in a tenant-in-common form, there needs to be a large savings realized by the tax deferral to justify the exchange.  Do not get into a tenant-in-common ownership without considering all aspects of the decision.

Loren L McCann, CPA, MS (Tax)

No comments:

Post a Comment