Holding Title to Shared Property
When you own property as tenants in common (TIC), you each own an undivided share. For example, if you own a duplex with another person as tenants in common, you each own a portion of the whole building, even though each of you may live in and maintain one of the units. TICs are customarily used when two or more unrelated people own a home together, and are also frequently used in multi-unit residential buildings, such as a duplex, triplex, or a four-plex. It is less common for more than four owners or households to hold title as a TIC.
If you take title to property as a TIC, you and your co-owner(s) will want to draft a written agreement covering each owner’s rights and responsibilities. For a multi-unit property, the TIC agreement gives each owner rights to and responsibility for one unit, which creates a feeling of separate ownership. Owners of TICs usually finance their property with a single mortgage secured by the whole property. This arrangement creates some hurdles, however: All owners must qualify together for the loan, for example, and all owners are at risk if one gets behind on the mortgage. It is for this reason that TIC agreements typically go into great detail on how co-owners divvy up financial obligations. Although the single-mortgage approach is still used for sharing a single-family home, a few lenders now offer fractional mortgages for TIC properties that are easier to divide into separate units. For a fractional mortgage, each owner signs a separate promissory note and deed of trust. Each must qualify for the loan separately and can select different loan terms. Each fractional mortgage is secured only by that owner’s interest in the property.
Joint tenancy is a form of ownership that includes a right of survivorship. When one owner dies, that person’s share of the property passes automatically to the other owner(s); in contrast, a TIC share goes to the owner’s heirs at death. Joint tenancy is most often used by couples and families, but it could also work well for unrelated owners in a small shared housing arrangement, if the owners want the security of knowing that their interests in the property will be protected if another owner dies.
Forming a joint tenancy usually requires that all owners have equal interests in the property, and that they acquired title at the same time, on the same title document. Most joint tenancies are financed with a single shared mortgage.
Condominiums are legally divided so that portions of the property can be separately owned. Condominium ownership typically involves owning both an individual unit and a share of ownership in common areas, often called “common elements.” Multi-unit properties that were not built as condominiums can often be converted to condos; this usually requires the assistance of an attorney and professional surveyor, and the process depends greatly on local laws and regulations.
A condominium form of ownership is often used in housing where residents own separate units. A condominium complex can be as small as a duplex or as large as a multi-story apartment building. Cohousing groups frequently use the condominium form because it facilitates both individual autonomy and sharing. With condominiums, each unit can be separately financed.
Condominium ownership typically requires membership in a community association that governs and manages the common elements and enforces restrictions on the use of units. These associations collect monthly dues, often called “assessments,” from each owner to pay for the costs of upkeep, taxes, insurances, and other expenses.
Ownership by an Entity
In some cohousing communities, residents own shares or a membership in a corporation or LLC, which, in turn, owns the entire property, including the individual units. Under many states’ legal definitions, this arrangement for holding title may be considered a “housing cooperative” or “stock cooperative.”
A note about the word “cooperative”
The use of the word “cooperative” here does not necessarily imply or require that a cooperative corporation be the entity of choice, nor that the entity operate “on a cooperative basis” under Subchapter T of the Internal Revenue Code, nor that the cooperative be managed democratically, nor that the cooperative follow the Rochedale Principles for cooperatives. The moral to the story is: the word “cooperative” has way too many meanings, and it’s no wonder that it’s hard to get a straight answer about what a cooperative is.
Typically, a resident buys into a community by purchasing shares and signing a “proprietary lease” that entitles the resident to occupy a particular residential unit. Unlike typical leases, a proprietary lease generally has no fixed term. It lasts as long as the resident is an owner in the entity and doesn’t violate important lease terms. The entity typically holds a single blanket mortgage on the property, and resident shareholders sometimes take out loans to finance their purchase of shares in the entity. In addition, residents pay regular fees to cover property taxes, management expenses, mortgage payments on the building, and so on.
Even though residents don’t own the real estate directly, they still might be able to enjoy some of the tax benefits of home ownership; that is, so long as the cooperative meets the IRS’ definition of a cooperative housing corporation (below). For example, although the corporation makes the mortgage and property tax payments, residents may still deduct their portion of these expenses from their income taxes. If residents take out a loan to purchase shares, however, the loan is usually treated as a personal loan, so the interest isn’t deductible.