With the cost of real and commercial property skyrocketing in the Bay Area many people have sought to form partnerships or joint ventures to purchase property. Oftentimes and individual cannot outright buy such an expensive piece of property however partnering with someone else may be beneficial. Many clients have came to our firm to structure deals regarding ownership of property and have wondered the implications of choosing a Tenancy in Common over a Limited Liability Company ("LLC").
A Tenant in Common ("TIC") owns percentages in an undivided property, rather than a particular unit or apartment. The amount is reflected in the deeds. Each tenant has the equal right to possess and have access to the property. Based on each person’s percentage ownership, the tenants are responsible for mortgage, taxes, and other necessary expenses.
The TIC can transfer or encumber part of his interest in the property, absent any restrictions by the lender. A TIC can also use his fractional interest as collateral to secure a loan.
A common form of business entity is the Limited Liability Company. An LLC, just as the name suggests, limits the liability of its members. There, a member would not be personally liable for obligations of the Company. Further, it enjoys the tax benefits of a pass through entity as there is no entity tax rate and the taxes flow to each individual member.
A lot of my clients come to me looking to structure their real property deal among several potential co-owners. I recommend such individuals structure their deals as tenants in common, rather than forming a separate entity to hold the property. Under IRS tax code section § 1031, allows a swap of one business or investment for another, a “1031 exchange.” If you come under section 1031, you will have no tax or limited tax due at the time of sale. In effect, you can change the form of your investment without cashing out or recognizing capital gain. This allows your investment to continue to grow tax-free.
A § 1031 exchange, however, only applies when there is an ownership interest in property. When a taxpayer owns property interest as a member of an LLC, he owns interest in the Company and not in the actual property. Therefore, a 1031 exchange is unavailable. Thus, if a member of an LLC that owns property were to sell his property and buy a similarly situated property he would be taxed on the gain. Whereas, if a TIC were to sell his property, he would get the benefit of deferring his taxable gain until possibly many years in the future.
Choosing the correct status between TIC and LLC can be challenging and complicated. If you have any questions about the best status for you, please feel free to contact Aziz Legal by phone or email at (408) 203-4627 or firstname.lastname@example.org.
This article is merely informational and is not intended to be used as legal advice. Use of any information from this article is for general information only and does not represent personal legal or tax advice, either express or implied. Readers are encouraged to consult Aziz Legal, or another attorney, for any specific legal matters.