Tenants In Common Experts

All Tenants in Common (TIC Properties) listed on this site are offered as real estate, not as Securities.

Tenant In Common, when used as replacement property for a 1031 exchange (or 1031 TIC Exchanges), is defined as a form of asset ownership in which two or more persons have an undivided fractional interest in the asset . The ownership interests are not required to be equal, can be inherited, and each co-owner has a separate deed.

The IRS has provided 15 guidelines by which a Tenant In Common (TIC) ownership interest will qualify for a tax deferred 1031 exchange. Guidelines for a 1031 TIC Exchange can be found in Revenue Procedure 2002-22 and are as follows:

1.  Tenant In Common Ownership: There can be no other way of holding title to the property other than Tenants In Common.

2.  Number of Co-Owners: There can be no more than 35 persons who acquire Tenants in Common interest in a given property. The only exception to this is that a husband and wife are treated as a single person; as are all persons who acquire interests from a co-owner though inheritance.

3.  The Co-Ownership may not be treated as a single Entity: A group of co-owners cannot treat itself as a partnership. Example: A partnership will file a single tax return; have one name for the entire group. The IRS will generally not approve of a property if the co-owners held title to the property in a partnership or corporation just prior to the formation of the TIC ownership.

4.  Co-Ownership Agreement: The co-owners may, but are not obligated to, enter into a limited co-ownership agreement that may “run with the land”. As an example: The agreement could include, among other things, that a co-owner who wishes to sell must give the other co-owners first right of refusal to purchase their interest (which must be at fair market value as determined on the date the right is exercised).

5.  Voting: There must be unanimous approval by the co-owners for the following:
  •   negotiation/re-negotiation of a contract
  •   hiring of a property manager
  •   sale of the property
  •   any lease for a portion or all of the property
  •   any “blanket lean” (mortgage) and any negotiation/re-negotiation of such

For all other actions the co-owners may agree to be bound by the outcome of a vote decided by those holding 50% or more of the undivided interests.

6.  Restrictions on Alienation: In general each owner must have the right to transfer its interest in the property without approval of any person. Exceptions to this rule are any restrictions required by a lender as long as they are consistent with “customary commercial lending practices”. Example: The lender may require that the whole property be refinanced to allow one of the owners to transfer their interest in the property. If you think you will sell prior to the end of the holding period, be sure to check this point with the sponsor prior to signing loan documents.

7.  Sharing Proceeds and Liabilities upon the Sale of the Property: When the property is sold all debt must be paid off prior to distribution of any profits to owners. Neither the manager, the sponsor nor any co-owners are permitted to advance funds for expenses to a co-owner unless the advance is “recourse” to the co-owner and for a term of less than 31 days.

8.  Proportionate Sharing of Profits and Losses: Each owner must share in all of the income and expense associated with the property according to the proportionate share of its undivided interest.

9.  Proportionate Sharing of Debt: Each owner must share in debt that is secured by a mortgage on the property, in proportion to its undivided interest.

10.  Options: Any co-owner may issue an option to purchase its interest provided that the price reflects its fair market value of the property at the time the option is exercised.

11.  No Business Activities: The co-owners’ activities must be limited to those customarily performed in maintaining and repairing the property. This rule does not apply if the co-owners own an undivided interest for less than 6 months (this part of the rule is meant to allow for a sponsor to prepare the property to be sold as a TIC).

12.  Management and Brokerage Agreements: The fees charged for all brokerage and management agreements must be at fair market value, must be renewed no less than once a year. The fees negotiated for these services may not be dependant on the amount of income received from the property.

13.  Leasing Agreements: All lease agreements must be valid for Federal Tax purposes and reflect their fair market value for the specific type of use specified in the lease. The amount of rent cannot depend on the amount of any income or profits produced by the property with the exception of an amount based upon a percentage of sales receipts of the lessee (percentage rent).

14.  Loan Agreements: Any lender for debt that encumbers the property may not be a related person to the sponsor, any co-owner, the manager or any lessee of the property.

15.  Payments to the Sponsor: Any payment to a Sponsor for the acquisition of the TIC interest must reflect the fair market value for the service and the value of the interest at the time of the purchase.

Although holding title in the form of Tenants In Common (TIC) has been around for a long time; for most of us the concept is new. The above guidelines are provided by the IRS to structure TICs in a way that will qualify them for a 1031 exchange, providing another avenue for an investor to continue to increase their cash flow and net worth.

When tenants in common perform 1031 exchanges, they are commonly referred to as 1031 TIC Exchanges. 1031 Exchanges and 1031 TIC Exchanges work exactly the same way. The benefits of an investor involved as a tenant in common doing 1031 TIC Exchanges are:
  •   There is a greater choice of replacement properties available and a high certainty of close
  •   Investors can more easily diversify their real estate portfolios to reduce risk.
  •   Small investors can purchase a fractional interest in a larger property they might not have otherwise afforded to invest in.
  •   Frequently, larger properties have better risk reward ratios than small properties.