1031 Exchange for a TIC (Tenancy-in-Common) Interest

Co-ownership is on the real-property list, but only if the co-owners are not partners

Treas. Reg. §1.1031(a)-3(a)(5)(i) names co-ownership among the intangible interests that are real property for §1031, and Reg. §301.7701-1(a)(2) says that 'mere co-ownership of property that is maintained, kept in repair, and rented or leased does not constitute a separate entity for federal tax purposes.' Rev. Rul. 75-374, summarized in Rev. Proc. 2002-22, found no partnership where two co-owners of an apartment building used an agent who collected rent and provided customary services such as heat, trash removal and parking.

The line breaks when co-owners 'carry on a trade, business, financial operation, or venture and divide the profits therefrom.' In Bergford v. Commissioner, 12 F.3d 166 (9th Cir. 1993), 78 investors who bought tenancy-in-common units in leased computer equipment were held to be partners: the manager took a 10% remarketing fee whether or not it did any remarketing, advanced funds interest-free, decided whether to sell or re-lease when no majority formed, and had to consent to any transfer of a unit.

If your arrangement is a partnership, what you own is a partnership interest, which the 2025 Form 8824 instructions list among assets that are never real property. The exchange would then have to be done by the co-ownership as an entity, or the structure unwound well before a sale.

Rev. Proc. 2002-22: the fifteen conditions the IRS wants before it will rule

Rev. Proc. 2002-22 sets out what a sponsored TIC must look like for the IRS to consider ruling that it is not a partnership. Section 3 says the guidelines 'are not intended to be substantive rules and are not to be used for audit purposes' and limits the procedure to rental real property 'other than mineral interests', yet sponsors and lenders build offerings around it because it is the only published map.

• Each co-owner holds title, directly or through a disregarded entity, as a tenant in common under local law; no entity holds the whole (§6.01).
• No more than 35 co-owners, counting a husband and wife as one person and all heirs of a co-owner as one (§6.02).
• No partnership return, no common trade name, no holding out as partners; the IRS generally will not rule if the owners held through a partnership immediately before forming the co-ownership (§6.03).
• Unanimous approval for any sale, lease or re-lease, blanket-lien financing, manager hire or management-contract renewal; other actions by more than 50% of the interests (§6.05).
• Each co-owner may transfer, partition and encumber its interest without anyone's approval, subject only to customary lender restrictions and a right of first offer (§6.06).
• Blanket-lien debt is paid at sale and the balance distributed; revenues, costs and debt are shared strictly pro rata; advances to a co-owner must be recourse and repaid within 31 days (§§6.07–6.09).
• Call options only at fair market value when exercised; no put options to the sponsor, lessee, lender or other co-owners (§6.10).
• Activities limited to customary maintenance and repair; management and brokerage agreements renewable at least annually, fees not tied to profits, and net revenues disbursed within 3 months (§§6.11–6.12).
• Leases at fair-market rent not based on net income or cash flow; a lender unrelated to any co-owner, sponsor, manager or lessee; sponsor paid fair value (§§6.13–6.15).

Selling the whole building when one co-owner wants cash and another wants to defer

Each tenant in common is a separate taxpayer with a separate exchange. Every co-owner signs the sale contract, each exchanging owner assigns its share of the contract to a qualified intermediary before closing, and the settlement statement pays each exchanging owner's net share to that owner's QI while the cash-out owner takes a check and reports its gain.

Hypothetical: three equal co-owners sell for $6,000,000 subject to a $2,000,000 blanket loan that §6.07 requires be paid at closing. Each owner nets $1,333,333 and is relieved of $666,667 of debt; under Reg. §1.1031(d)-2 that relief is money received, so an exchanging owner must take on $666,667 of new debt on the replacement or add the same amount of cash, or recognize gain on the shortfall.

The unanimous-consent rule in §6.05 is the practical bottleneck: one co-owner can block the sale, the refinancing and the manager's renewal. That is usually the moment owners discover whether their co-ownership agreement contains the fair-market-value buy-out or right of first offer that §6.04 and §6.06 permit.

TIC share into a DST, or into a property you own alone

Moving from a TIC into a DST trades votes for simplicity. Under Rev. Rul. 2004-86 each DST beneficial owner is treated as owning an undivided interest in the trust's real estate, and API Exchange notes that the lender 'views the trust as only one borrower' rather than up to 35, that DST investors have no voting rights where a TIC needs unanimous approval, and that there is no 35-investor cap.

The cost is control: the DST trustee cannot renegotiate leases, refinance, or make more than minor non-structural changes, and if it acquires those powers the trust becomes a partnership. A sole-owned replacement restores control and brings back management, financing and single-asset risk; the trade-offs are laid out on DST versus direct ownership.

Either way the exchange math is the same: your share of the price, your share of the debt relieved, and your own 45- and 180-day clocks running from the closing date.

Getting out when the other co-owners will not sell

A TIC built to Rev. Proc. 2002-22 gives every owner 'the rights to transfer, partition, and encumber the co-owner's undivided interest in the Property without the agreement or approval of any person' (§6.06). Three exits follow from that right, and each is a sale of real property you can exchange through a QI. Have your CPA or attorney read the co-ownership agreement and the loan documents for transfer restrictions before you pick one.

• Sell your undivided interest to the sponsor, another co-owner or a third party after honoring any right of first offer; the agreement may require you to offer it at fair market value before partitioning (§6.04).
• Exercise or negotiate a call option; §6.10 allows calls priced at your percentage of the whole property's fair market value at the time of exercise.
• Seek partition under state law; a court-ordered sale of the whole property is a sale by every co-owner, and each may exchange its own share.