Tenants In Common Glossary
Our Glossary serves as a comprehensive guide to understanding the key terms and concepts related to tenants in common, a type of property ownership where two or more individuals hold a fractional interest in a property. Whether you are a property owner, investor, or just someone looking to learn more about tenants in common, this glossary provides clear and concise definitions of the most important terms and concepts related to this type of ownership structure. From "Capital Gain Tax" to "Amortization", we have you covered. So take a look around, and deepen your understanding of tenants in common today!
The estimated value of a property as determined by an appraiser.
The transfer of a tenant's lease to another person.
A person or entity who holds a beneficial interest in a trust.
A licensed professional who manages a real estate brokerage and assists buyers and sellers in the purchase and sale of real estate.
A capital gain refers to the profit that an investor makes from the sale of an investment property that has appreciated in value over time. This capital gain is typically subject to taxes, but by utilizing a 1031 exchange, investors can defer those taxes by reinvesting the proceeds from the sale into another like-kind property.
To qualify for a 1031 exchange, the new property must be similar in nature and purpose to the old property, and the entire proceeds from the sale must be reinvested into the new property. By deferring the capital gains taxes through a 1031 exchange, investors can continue to grow their real estate investments without having to pay taxes on the gains until they sell the new property.
Capital Gain or Loss
A capital gain or loss refers to the difference between the amount paid for a property and the amount received when it is sold. If the selling price is higher than the purchase price, the taxpayer has a capital gain, and if the selling price is lower than the purchase price, the taxpayer has a capital loss.
In a 1031 exchange, the capital gain or loss on the relinquished property is deferred rather than realized, meaning that the taxpayer does not have to pay taxes on the gain or loss at the time of the sale. Instead, the gain or loss is carried forward and applied to the replacement property acquired in the exchange. This can provide significant tax benefits to taxpayers who are looking to sell one property and acquire another.
Capital Gain Tax
Capital Gain Tax refers to the tax imposed on the profit realized from the sale of an asset that has increased in value over time. In the context of a 1031 exchange, a capital gain tax would apply to the difference between the sale price of the original property and its adjusted basis (i.e., the original cost plus any capital improvements made during ownership).
However, if the property owner uses the proceeds from the sale of the original property to acquire a like-kind replacement property through a 1031 exchange, they may be able to defer paying capital gain taxes on the sale of the original property until the sale of the replacement property. This allows them to reinvest the full sale proceeds into the new property, thus maximizing their investment potential.
Capital gains refer to the profits that an investor realizes when they sell an asset, such as real estate, stocks, or bonds, at a price higher than their original purchase price. In the context of a 1031 exchange, capital gains tax is an important consideration as it can be deferred by reinvesting the profits from the sale of a property into a like-kind property through the exchange process.
The 1031 exchange industry is a tax strategy that allows investors to defer paying capital gains taxes on the sale of a property by reinvesting the proceeds in a similar type of property. This can be a valuable tool for real estate investors looking to maximize their profits while minimizing their tax liabilities. The goal of a 1031 exchange is to allow investors to exchange one investment property for another without triggering a taxable event, thereby deferring the payment of capital gains taxes until a later date.
The loss incurred from selling an asset, such as a property.
The final step in the sale of a property, where ownership is transferred and payment is made.
Closing costs refer to the fees and expenses associated with the transfer of ownership of a property from one party to another in a 1031 exchange transaction. These costs typically include title search and insurance, recording fees, appraisal fees, loan origination fees, inspection fees, and other charges related to the transfer of property ownership.
In a 1031 exchange, the buyer and seller typically share the closing costs, and they can be paid out of the proceeds from the sale of the relinquished property or from the funds held by the qualified intermediary (QI) during the exchange process. It is important for investors to understand the potential closing costs associated with a 1031 exchange when evaluating the financial feasibility of a transaction.
Co-tenancy is a concept in property law, particularly derived from the common law of real property, which describes the various ways in which property can be owned by more than one person at a given time. If more than one person owns the same property, they are referred to as co-owners, co-tenants, or joint tenants.
The type of ownership determines the rights of the parties to sell their interest in the property to others, to will the property to their devisees, or to sever their joint ownership of the property. Just as each of these affords a different set of rights and responsibilities to the co-owners of the property, each requires a different set of conditions in order to exist. In general, a co-tenancy allows that:
- Each owner has an unrestricted right of access to the property.
- Each owner has a right to an accounting of profits made from the property. If the property generates income (such as rent) or a tax credit (such as depreciation), each owner is entitled to a pro-rata share of that income.
One of the owners of a property held in tenancy in common.
The fee paid to a real estate agent or broker for their services.
The portion of a property that is shared by multiple tenants, such as hallways or parking lots.
A legal document that transfers ownership of a property from one party to another.
The decrease in value of an asset over time, used for tax purposes.
A person who receives property through a will.
The right to use a portion of another person's property for a specific purpose, such as a shared driveway.
A legal claim against a property, such as a mortgage or lien.
The value of a property minus any outstanding debt or liens.
A neutral third party that holds funds and documents in a real estate transaction until the closing.
The legal process of removing a tenant from a property.
The person named in a will to manage the deceased person's estate.
The legal process of selling a property to pay off a mortgage or lien.
A person who guarantees payment of rent or other obligations of a tenant.
A person who inherits property from a deceased owner.
A tenant who continues to occupy a property after the expiration of the lease agreement.
A thorough inspection of a property by a professional inspector to identify any potential issues or problems.
Homeowner's Association (HOA)
An organization that manages and maintains common areas and amenities in a community of homeowners.
A person who dies without a will.
A form of ownership where each owner has an equal share in the property, and when one owner dies, their share automatically passes to the other owner(s).
Jointly And Severally
A legal term indicating that each owner in a tenancy in common is liable for the entire debt or obligation.
The owner or manager of a property who leases it to a tenant.
The right of a landlord to retain possession of a tenant's property until unpaid rent or damages are paid.
A fee charged by a landlord for late payment of rent.
A contract between a landlord and tenant that sets forth the terms and conditions of a rental agreement.
A lease agreement that includes an option for the tenant to purchase the property at a later date.
A lease agreement that includes an obligation for the tenant to purchase the property at a later date.
The process of extending a lease agreement for another period of time.
The right to occupy a property for a specified period of time as specified in a lease agreement.
A legal claim against property used to secure a debt.
The price a willing buyer and seller would agree upon for a property in the current market.
A loan used to purchase property, which is secured by a lien on the property.
Multiple Listing Service (MLS)
A database of properties for sale that is used by real estate agents and brokers.
Notice To Quit
A legal notice given to a tenant to vacate a property.
A fee paid by a tenant for the option to purchase a property at a later date.
The legal process of dividing a property held in tenancy in common into separate shares.
Power Of Attorney
A legal document that gives one person the authority to act on behalf of another person.
The legal process of administering a deceased person's estate.
The price agreed upon for the sale of a property.
The right of a tenant to occupy a rented property without interference from the landlord.
A type of deed that transfers ownership of a property without any warranties or guarantees.
Real Estate Agent
A licensed professional who assists buyers and sellers in the purchase and sale of real estate.
Payment made by a tenant to the owner of a property in exchange for the right to use and occupy the property.
A system of government regulation that limits the amount of rent that can be charged for a property.
A system of government regulation that limits the amount of rent that can be increased for a tenant.
A written agreement between a landlord and tenant that outlines the terms and conditions of the rental.
Right Of Entry
The right of a landlord to enter a rented property for certain purposes, such as making repairs.
Right Of Survivorship
The right of the surviving joint tenant(s) to inherit the share of a deceased joint tenant.
A sum of money paid by a tenant to a landlord to cover any damages or unpaid rent at the end of the lease.
A lease agreement between a tenant and a third party for a portion of the leased space.
Tenancy At Will
A tenancy that can be terminated at any time by either the landlord or tenant.
Tenancy By The Entirety
A form of joint ownership that is only available to married couples, where each spouse has an equal interest in the property.
Tenancy For Years
A tenancy that lasts for a specified period of time, such as a year.
Tenancy In Common
A form of joint ownership of property where each owner has a separate and distinct share of the property.
The individual or entity who leases the property from the landlord.
Tenant (Tenancy) In Common Interest
A fractional ownership interest in a piece of property, rather than owning the entire piece of property. A separate, undivided fractional interest in the property. A tenants-in-common interest is made up of two or more individuals, who have equal rights of possession. Co-tenants' interests may be equal or unequal and may be created at different times and through the use of different conveyances. Each co-tenant has the right to dispose of or encumber his or her interest without the agreement of the other co-tenants. He or she cannot, however, encumber the entire property without the consent of all of the co-tenants. In an IRC Section 1031 Exchange, an exchangor may acquire a tenancy-in-common interest with one or more other investors, as his or her like-kind replacement property. For purposes of IRC Section 1031 Exchanges, a co-tenancy must only engage in investment activities, including supporting services that would typically accompany the investment. Co-tenants that are engaging in separate business activities are treated as partnerships by the I.R.S.
Improvements made to a rental property to meet the specific needs of a tenant
Tenants In Common
A tenant in common investment is an alternative to sole ownership of real estate where investment in a single commercial property is held by multiple owners, not as limited partners or as an entity, but as individual owners. This form of ownership is known as co-tenancy or tenants in common (TIC). Under this co-ownership structure, you will own an undivided fractional interest in an entire property and share in your portion of the net income, tax shelters, and growth. Further, you will receive a separate deed and title insurance for your percentage interest in the property and have the same rights as a single owner.
The legal ownership of a property.
Insurance that protects against loss due to defects in the title of a property.
The process of reviewing public records to verify the ownership and legal status of a property.
A legal arrangement where one person (the trustee) holds property for the benefit of another person (the beneficiary).
The person named to manage a trust.
Each owner's share in a tenancy in common, which is not physically divided but rather represents a proportionate share of the whole.
Each owner's share in a tenancy in common, which is not physically divided but rather represents a proportionate share of the whole.
Unity Of Possession
Each owner in a tenancy in common has the right to possess and use the entire property.
A type of deed that provides a guarantee that the seller has clear ownership of the property being sold.
The regulation of land use by a local government, which determines the types of activities and structures that are allowed on a property.
An accredited investor also referred to as a sophisticated investor, is an investor with special status under financial regulations.
Adjusted Gross Income
The amount of money an investment generates after any tax liabilities have been paid. The first step in calculating after-tax cash flow is determining taxable income, then applying the appropriate marginal tax rate to produce one’s tax liability. As stated by the IRS, there are several deductions a taxpayer may claim that reduce taxable income, and thus his or her tax liability. Common deductions include mortgage interest payments and depreciation.
To provide an example, say a property generates $500,000 of Net Operating Income. Now assume that annual depreciation for the property is $400,000, and taxable income would be $100,000. If an investor falls into a marginal income tax bracket of 35%, the tax liability would be $35,000. Deducting this number from the pre-tax income of $500,000, after-tax cash flow would equate to $465,000.
After-Tax Cash Flow
The amount of money an investment generates after any tax liabilities have been paid. The first step in calculating after-tax cash flow is determining taxable income, then applying the appropriate marginal tax rate to produce one’s tax liability. As stated by the IRS, there are several deductions a taxpayer may claim that reduce taxable income, and thus his or her tax liability. Common deductions include mortgage interest payments and depreciation. To provide an example, say a property generates $500,000 of Net Operating Income. Now assume that annual depreciation for the property is $400,000, and taxable income would be $100,000. If an investor falls into a marginal income tax bracket of 35%, the tax liability would be $35,000. Deducting this number from the pre-tax income of $500,000, after-tax cash flow would equate to $465,000.
An alternative investment is an investment in asset classes other than the three traditional asset types (stocks, bonds, and cash). Most alternative investments are held by accredited investors because of their complex nature, limited regulations, and lack of liquidity.
These investments include hedge funds, real estate, private equity, and commodities. Alternative investments may also include other non-traditional assets such as art, stamps, antiques, or wine.
Amortization is paying off debt over a period of time with a fixed repayment schedule in regular installments. Monthly mortgage payments are often comprised of primarily interest at the beginning of the loan term, with the principal component increasing with each subsequent payment.
For example, a $100,000 mortgage with a 5.0% interest rate and 30-year amortization schedule would consist of monthly payments of $536.82. The month one payment would allocate $416.67 to interest ($100,000 balance multiplied by the 5.0% interest rate divided by 12 months) and the balance of $120.15 would be applied toward principal reduction.
In month two, the principal balance would be reduced to $99,879.85 ($100,000 beginning balance less the $120.15 principal payment from month one) and the monthly payment would be allocated $416.17 to interest ($99,879.85 balance multiplied by the 5.0% interest rate divided by 12 months) and the balance of $120.65 applied toward principal reduction.
Anchor tenant is the tenant that acts as the primary draw to a commercial property. It is usually the largest tenant in a shopping center or retail development. A common example is a grocery store.
Annual Percent Yield
The annual percentage yield allows investors to compare investments with different annual percentage rates (APR). It’s a way to do an apples-to-apples comparison. APY accounts for periodic compounding interest. As interest is added to the account, the next interest payment will be bigger. The longer an investor allows the account to compound interest, the bigger it will be at the end of some predetermined period.
It’s important to point out that APY does not take into account any fees. APR does account for fees. This is another difference between APY and APR.
An appraisal is an estimate of a property’s fair market value by an authorized person with applicable knowledge and expertise. Appraisals can be used for taxation purposes or to determine a possible selling price for a given property.
Appreciated property is a property that has increased in value over time. This increase can occur for a number of reasons including increased demand or weakening supply, or changes in inflation or interest rates.
Appreciation is the increase in the value of an asset over time, which can be affected by a number of factors such as increased demand, weakening supply, or changes in inflation.
The monetary value of the property is determined for tax purposes. Assessed values are given by government assessors and act as the basis for property taxes. Each tax district has a different method for conducting assessments, although all tend to rely upon similar factors such as comparable home sales, replacement value, and any income being generated from the property. Assessed values are typically less than private appraisal valuations in most jurisdictions, as assessed values act as a percentage of fair market value. In Mississippi, for example, the assessed value is just 10% of the determined fair market value for single-family, residential real property.
While market values may fluctuate substantially, increasing or decreasing every year, assessed values tend to be less volatile. This is commonly due to state legislation limiting how much the assessed value of a property may increase year to year. In Oregon, for example, it is prohibited that the assessed value of land, that has not been improved from the previous year, increase in value more than 3% from the prior year.
A local government official determines the assessed value of taxable property in a county or municipality. This valuation is used to determine the tax basis for a property in a given area.
After being appointed or elected, assessors are trained in common property appraisal techniques, reaching a degree of certification that varies from city to city. In some cases, continuing education or even no certification is required for an assessor to maintain his or her status.
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