Are Tenants-in-Common (TIC) Properties Considered “Like-Kind” in a 1031 Exchange?

One of the most common misunderstandings in 1031 exchanges is the definition of “like-kind” property. Many investors mistakenly believe they must replace a single-family rental with another single-family rental. The truth is much broader—and more flexible.

In 2002, the IRS issued Revenue Procedure 2002-22, clarifying that a Tenants in Common (TIC) interest qualifies as “like-kind” real estate for 1031 exchange purposes. A TIC structure allows multiple individuals to hold undivided fractional interests in the same property, enabling investors to pool resources and access higher-quality real estate.

However, to ensure the TIC interest is compliant and not inadvertently treated as a partnership interest (which is disqualified from 1031 treatment), several conditions must be met:

  • A formal written TIC agreement must exist.

  • Co-owners must not present themselves as a partnership—no partnership tax returns, no joint business names.

  • Profit/loss allocations and decision-making rights must be proportional to each owner’s equity share.

Another key requirement: specificity. When identifying replacement property, an investor must state the exact ownership interest being acquired—for example, “an undivided 14.5% interest in 105 E Third Street, Ottumwa, Iowa,” not simply “a TIC interest in 105 E Third Street.”

TIC investments can be particularly useful when a single investor lacks the capital to acquire a replacement property alone. For instance, an investor with $125,000 in proceeds might partner with others to acquire a $1.1 million property, purchasing a proportionate TIC interest.

This structure offers flexibility, scale, and access to better real estate while preserving 1031 eligibility—provided all IRS requirements are meticulously followed.

FAQ’s

1. What are the risks or downsides of investing in a TIC property compared to sole ownership in a 1031 exchange?
TIC investments offer access to larger assets, but they also come with unique challenges:

  • Limited Control: Major decisions often require unanimous or majority consent from co-owners.

  • Liquidity Constraints: Selling your fractional interest can be more complex and may require approval from other investors.

  • Operational Risks: If other co-owners default on their obligations (like shared expenses), it can affect the entire property and your investment.

2. How does the IRS verify that a TIC structure isn’t actually a disguised partnership, and what are the consequences if it is?
The IRS uses guidelines set forth in Revenue Procedure 2002-22 to distinguish a valid TIC from a partnership. They examine factors such as:

  • Separate tax reporting

  • Individual control over TIC interests

  • Proportional sharing of income and expenses
    If the IRS determines the structure operates as a partnership, the 1031 exchange may be disqualified, resulting in immediate capital gains taxes on the relinquished property.

3. Can I sell my TIC interest independently later on, or am I restricted by the agreement or other co-owners?
Yes, you can generally sell your TIC interest independently. However, restrictions may apply:

  • Right of First Refusal: Many TIC agreements give existing co-owners the first opportunity to purchase your interest.

  • Marketability: Fractional interests are harder to sell than whole properties and often appeal to a smaller pool of investors.

  • Lender Approval: If there is financing involved, the lender may need to approve any ownership changes.