What Is A TIC And How Are They Used For 1031 Exchanges?

Posted Jul 13, 2016

TIC 1031 Exchange Tenant In Common Cover Photo

 “TIC” is an acronym referring to Tenant-In-Common (TIC) investments in properties by multiple 1031 exchange investors. Tenants-In-Common, is a legal term that describes a form of ownership by more than one party in real estate, or any asset. In this case, the term “tenant” means a co-owner of a property, and not someone that rents the property. The distinguishing features of the tenants-in-common ownership form are:

  • All tenants (co-owners) hold an individual, undivided interest in a property;
  • Ownership may be held in unequal shares;
  • Each ownership interest may be separately sold or mortgaged; and
  • Upon death of a tenant, the interest of the deceased will pass to their heirs.      

The use of the TIC structure has evolved for tax purposes pertaining to 1031 exchanges. Per IRS requirements, 1031 tax deferral benefits only apply if a taxpayer reinvests directly in a real estate; the benefits do not apply if reinvestment is in a company (like a REIT), partnership or LLC that owns the property. In a TIC structure, each of the investors co-own an undivided interest in a property, thereby qualifying for 1031 exchange tax deferral treatment.

Per IRS guidance, TICs must meet certain conditions to qualify for 1031 exchanges, including:

  • Limited to 35 co-owners.
  • Material decisions must receive unanimous approval by the co-owners.
  • Co-owners must share (by ownership percentage) all income, expenses, debt service, and distributions. Parties not on title (e.g. sponsor) may not share in these amounts.  
  • Sponsors may be reasonably compensated for orchestrating the transaction, but may not be paid based on profits or investor returns.

Despite its benefits, the TIC structure has its drawbacks:

  • Costs. To limit co-owner liability, each investor must create and maintain a single member LLC.    
  • Investor Limits. The 35-investor limit increases minimum equity investments by the co-owners, and effectively limits the amount of equity that can be raised and the size of property to be acquired.
  • Financing. Under a TIC structure, each co-owner is a borrower on the mortgage, making the process complicated and expensive for the investors.
  • Control. Property title is held by (up to 35) separate owners, none of whom has outright control of the asset. Also, a judgement lien against one co-owner may create a lien against the co-ownership interest of the other co-owners.   

In recent years, the Delaware Statutory Trust (DST) has emerged as an alternative to the TIC structure. For additional information, see our blog titled Tenants-in-Common vs. Delaware Statutory Trusts. As with any investment vehicle, there are pros and cons to the TIC structure and investors should consult their financial advisors before making any 1031 exchange investment.

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