If you're an investment property owner in a Tenants-in-Common (TIC) arrangement, you may be wondering if a 1031 Exchange is possible when exiting a TIC investment. The answer in some cases is yes—provided specific IRS requirements are met. It's important to understand that 1031 eligibility is highly fact-specific, and compliance with regulatory and structural guidelines is essential to preserve tax-deferral benefits.
Understanding TIC Ownership
Tenants-in-Common (TIC) is a form of co-ownership where two or more individuals hold separate, undivided fractional interests in the same real property. Unlike a partnership or LLC, each TIC owner is directly interested in the real estate. This distinction is significant because IRS rules under Section 1031 apply only to exchanges of real property held for investment or use in a trade or business.
Why Direct Ownership Matters
The IRS has clarified that TIC owners may exchange their fractional interests for other qualifying real estate — such as a rental home, commercial property, or interests in a Delaware Statutory Trust (DST), provided the interest represents a direct ownership stake in real property—not a partnership interest or an interest held through an entity.
IRS Revenue Procedure 2002-22 outlines specific guidance for structuring TIC arrangements to ensure they are treated as real estate ownership, not as a partnership.
Some of these requirements include:
- No more than 35 TIC co-owners
- Unanimous approval for major decisions
- Separate deeded interests and direct title ownership
- No entity-level governance (e.g., no general partner)
- Unanimous consent is required for material decisions affecting the property
If the TIC does not follow these guidelines, it could be recharacterized as a partnership — making it ineligible for a 1031 Exchange.
Planning the Exit
Executing a 1031 Exchange from a TIC takes planning and coordination. Since TIC owners share ownership, a sale of the entire property typically requires unanimous consent. Each co-owner must decide whether they wish to:
- Complete their own separate 1031 Exchange into a replacement property
- Cash out and recognize any capital gains
- Reinvest into another shared vehicle, such as a DST
Fortunately, because each TIC owner holds title to their fractional interest, they can generally execute their exchange independently, assuming the property is sold in its entirety and their portion of the proceeds is appropriately segregated.
Due to the complexity of these transactions, investors should work closely with a qualified intermediary (QI), tax advisor, and legal counsel to ensure the structure and timing of their exchange meets all applicable IRS rules.
From TIC to DST: A Natural Evolution
Many TIC owners explore transitioning into a Delaware Statutory Trust (DST) as part of their 1031 strategy. DSTs are considered eligible like-kind replacement properties for purposes of Section 1031.
DSTs offer investors a passive ownership interest in institutional-grade real estate portfolios that are professionally managed. For TIC investors who wish to reduce the demands of direct property management or consolidate proceeds into a diversified, income-generating structure, a DST may be one potential option to consider.
That said, DSTs are not suitable for all investors. Tax treatment, liquidity, and risk factors should be carefully reviewed with a financial professional before making any exchange decisions.
Final Thoughts
Yes, you can 1031 out of a TIC, but the process requires that your interest qualifies as direct real estate ownership and complies with IRS guidance. Careful attention to legal structure, documentation, and operational control is critical to avoiding reclassification and preserving tax-deferral benefits.
Whether exiting a TIC, managing a 1031 Exchange, or transitioning into a DST, it’s important to work closely with tax, legal, and qualified intermediary professionals. These decisions carry long-term tax and financial implications, and thoughtful execution can support your broader investment and estate planning goals.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
