Tenancy in Common (TIC) 1031 Exchange: How It Works, Who It Fits, and the Catch

How a TIC exchange works

Tenancy in common is a form of co-ownership in which each owner holds a separate, undivided fractional interest in the whole property, with its own deed. Because each owner holds real property directly, a TIC interest can be like-kind replacement property in a 1031 exchange.

The catch is entity classification. If the co-owners act like a business together (sharing profits from services, operating under a common name, filing as a partnership), the IRS can treat the arrangement as a partnership. A partnership interest is not real property, so it cannot be 1031 replacement property, and the exchange fails.

TIC exchanges show up in two forms:

• Sponsored TIC programs. A sponsor buys an office, retail or apartment property and sells fractional interests to many 1031 buyers. These were common before 2008. After Rev. Rul. 2004-86 approved the Delaware statutory trust for 1031 use, and after many TIC programs struggled in the 2008 to 2010 downturn, most sponsored fractional offerings moved to that structure.
• Private TICs. Two or three owners, often family members or former partners, holding a property together. This is also how a partnership "drop and swap" works: the partnership deeds TIC interests to its partners so some can exchange and others can cash out.

The Rev. Proc. 2002-22 conditions

Rev. Proc. 2002-22 sets out the conditions under which the IRS will consider issuing a private ruling that a TIC is not a partnership. It is not a safe harbor, but it is the standard everyone drafts to. The main conditions:

• Each co-owner holds title as a tenant in common under local law, and there are no more than 35 co-owners (a married couple counts as one).
• The co-ownership may not file a partnership or corporate return, conduct business under a common name, or hold itself out as an entity.
• Unanimous approval is required for any sale, lease or re-lease, negotiation of debt secured by a blanket lien, hiring of a manager, or management contract. Other actions may be by owners holding more than 50% of the interests.
• Each owner may transfer, partition or encumber its own interest without approval, subject to lender restrictions, and may hold only limited rights of first offer.
• Revenues, debts and costs are shared in proportion to ownership. The sponsor, manager or lessee may not lend to any co-owner, and advances to cover expenses must be recourse and repaid within 31 days.
• Management agreements must be renewable at least annually, fees must be at market and may not depend on income or profits.
• Activities are limited to those customary for owning rental real estate (see Rev. Rul. 75-374).

Who it fits, and who it does not

Good fit: exchangers who want to place odd-sized proceeds into a larger, better property; partners who need to split up so each can choose an exchange or a cash-out; family members inheriting a property together who want to keep their tax options separate.

Poor fit: anyone who needs quick liquidity (a TIC fraction is hard to sell), owners who do not want to be bound by unanimity, and buyers of sponsored programs who cannot evaluate the sponsor, the loan and the fees. Sponsored TIC interests are usually securities, so they come with offering documents and often accredited-investor limits.

Worked example (engine-computed)

Assumptions (labeled, not a client case): a married couple filing jointly, 2026, $150,000 of other ordinary income, selling a rental with $1,200,000 of gain ($300,000 of unrecaptured Section 1250 gain and $900,000 of other long-term gain). They exchange into a 30% TIC interest in a larger building, matching the value and debt they gave up.

Computed with the Big Sale Tax engine as the increase in 2026 tax. That is the amount at stake if the TIC is later treated as a partnership. It is why the co-ownership agreement, not the sales brochure, is the document that matters.

IRS stance and audit risk

TIC ownership is a normal property law arrangement, and a properly run TIC interest is real property for 1031 purposes. It is not a listed transaction. The risk is reclassification as a partnership under Treas. Reg. 301.7701-1 and -3, which would make the interest a partnership interest, not like-kind real estate.

Drop and swap transactions add a second issue: whether the partners held the TIC interests "for investment" after receiving them just before the sale. Cases such as Magneson v. Commissioner, 753 F.2d 1490 (9th Cir. 1985), and Bolker v. Commissioner, 760 F.2d 1039 (9th Cir. 1985), support holding-period continuity, but the IRS continues to challenge last-minute conversions. Do the conversion well before a sale is agreed, and operate as true co-owners afterward.

Costs and fees

• Sponsored programs: load and acquisition fees built into the purchase price, asset management and property management fees, financing fees, and a disposition fee at sale. Read the offering memorandum's fee table.
• Private TICs: legal fees for a co-ownership agreement drafted to Rev. Proc. 2002-22, title work, and lender consent.
• Loans on TIC properties are usually non-recourse to each owner but carry carve-outs, and some lenders require each owner to form a single-member LLC.

How it compares with a Section 453 installment sale

A TIC exchange keeps you in real estate as a passive co-owner and defers all gain, but you trade control for a vote and liquidity for a fraction that is hard to sell. A Section 453 installment sale exits real estate entirely and spreads tax over the note's payments, with the buyer's credit risk managed through a down payment, a first-position deed of trust, interest at or above the applicable federal rate, and acceleration and default terms (see seller financing).

For partners who disagree, a TIC split plus a mix of tools is common: one partner exchanges, another sells with a note, a third takes cash. The $5,000 Big Sale Tax Analysis models each partner's path separately.

Frequently asked questions