What Is Tenancy in Common?

In real estate, tenancy in common (TIC) is a form of property co-ownership that provides individuals the ability to own distinct interests in a single property. It is commonly used by family members, friends, or investors who want to jointly hold title to a real estate asset while retaining flexibility and control over their respective shares. 

TIC properties have become increasingly popular among both individual buyers and real estate investors because they allow great investment flexibility and, when properly structured, may qualify for a 1031 exchange -- a powerful tax-deferral strategy under Section 1031 of the Internal Revenue Code. 

This article will define TIC properties, explain how they work, and explore how they qualify for 1031 exchanges. 

Defining Tenancy in Common Properties 

A TIC property is one in which two or more people hold title to real estate, with each person owning a specific, fractional interest. These shares do not need to be equal and may vary based on each party’s financial contribution or negotiated agreement. 

Unlike joint tenancy, a TIC interest has no right of survivorship. When a co-owner dies, their interest passes to their heirs or estate rather than to the remaining co-owners. 

Each co-owner holds an undivided right to possess and use the entire property in proportion to their ownership share, though no physical division of ownership exists. This means that even someone who owns only 10% has the legal right to use 100% of the physical property. 

How Tenancy in Common Works 

Here’s a quick breakdown of how tenancy in common typically works. 

Separate but Undivided Ownership 

Each TIC co-owner holds title to a separate, undivided fractional interest in the property. However, this title is to a portion of the value, not a physical section of the property. All co-owners share equal access and usage rights. This structure allows for flexibility while preserving a unified ownership of the physical asset. 

For example, let’s say three investors purchase a commercial building together. Investor A owns 50%, Investor B owns 30%, and Investor C owns 20%. They can each claim a proportional share of rental income and tax benefits based on their ownership percentages. Despite the unequal shares, they each have access to the entire building. 

Transferability 

Each owner’s interest is generally transferable. A TIC owner may sell, gift, mortgage, or bequeath their share (though, keep in mind that some TIC agreements restrict transfers to preserve compliance or funding terms).

This flexibility makes TICs especially appealing to real estate investors and estate planners. 

Responsibilities

Co-owners typically agree to share in the cost of taxes, maintenance, insurance, and other expenses based on their ownership percentages. A written TIC agreement can clarify these obligations and help prevent disputes.

Tenancy in Common and 1031 Exchange Eligibility

A 1031 exchange allows a real estate investor to defer paying capital gains tax by reinvesting the proceeds from the sale of one investment property into another like-kind property. For TIC investors, this is a crucial consideration.

Are TIC Properties Eligible for a 1031 Exchange?

Yes, TICs are eligible for a 1031 exchange, but with specific qualifications. The IRS may recognize TIC interests as eligible for 1031 exchange treatment if the ownership structure meets specific requirements that ensure the interest is treated as a direct real property ownership rather than a partnership interest. This has made TIC properties a popular option for investors seeking to complete a 1031 exchange.

To be eligible, the tenancy in common arrangement must resemble a direct property ownership, not a partnership or security. The IRS outlines guidelines in Revenue Procedure 2002-22 for these TIC interests to not be deemed a partnership which include: 

• No more than 35 co-owners may hold TIC interests in the property. 

• Each co-owner must hold direct title as a tenant in common (not as a shareholder or partner). 

• Each co-owner must independently exercise control over the property (e.g., voting rights). 

• Co-owners must share in income, expenses, and debt  in proportion to their ownership interests. 

• Financing (if any) must be non-recourse to individual investors. 

Failure to meet these standards could cause the IRS to treat the investment as a partnership interest, which is not eligible for 1031 exchange treatment.

How 1031 Exchanges Work with TIC Properties

Let’s look at two common scenarios:

1. Exchanging Into a TIC Property

An investor who sells a rental property can use the proceeds to purchase an interest in a qualifying TIC property. For example, after selling a $500,000 duplex, an investor might acquire a 10% undivided interest in a $5 million apartment building structured as a TIC. If all IRS requirements are met, this can complete a valid like-kind exchange, allowing the investor to defer capital gains taxes.

This approach allows smaller investors to access high-value institutional-grade properties they could not afford outright while maintaining eligibility for tax deferral under the 1031 rules. 

2. Exchanging Out of a TIC Property

If an investor wants to sell their TIC interest, they may do so and use the proceeds in another 1031 exchange. The challenge here is finding a buyer for a fractional interest in a property, which can be less liquid than whole ownership. However, it remains a valid strategy if and when the investor needs to acquire a new investment property.

Benefits of TIC for 1031 Investors

Tenancy in common has become a go-to structure for 1031 exchange transactions due to the following advantages: 

• Access to Institutional-Grade Properties: Investors can buy fractional interests in large commercial properties. 

• Passive Investment Opportunity: Many TICs are managed by third parties, allowing investors to participate without day-to-day responsibilities. 

• Custom Ownership Shares: Investors can match their replacement property investment amount closely to fully defer recognized capital gains. 

• Estate Planning Benefits: Each TIC interest is separately titled and can be passed on to heirs, offering flexible estate distribution. 

Risks and Considerations

Though TICs offer clear benefits for 1031 exchange participants, they also carry unique risks: 

• Lack of Control: Some TIC agreements limit an investor's ability to make decisions unilaterally. 

• Liquidity Issues: Selling a fractional interest can be difficult and may take time. 

• Default Risk: If one co-owner fails to meet financial obligations (e.g., taxes or loan payments), the entire property could be affected. 

• Partition Actions: In worst-case scenarios, disputes among co-owners may result in a partition, forcing the sale or division of the property. 

Proper legal and financial structuring—ideally with guidance from a TIC sponsor, tax advisor, and qualified intermediary—is essential to avoid these issues.

Partition in TIC: A Legal Last Resort

If disagreements arise among co-owners, and no resolution can be reached, one party may file for a partition. This legal process can result in a court-ordered division or sale of the property, depending on state law and the property’s characteristics. In most real-world TIC structures, partition is rare but possible, especially in family-held properties or those without a TIC agreement.

Why Investors Choose TIC Properties

Today, TICs are commonly used in real estate investment circles for their unique combination of flexibility, tax advantages, and access to premium real estate. Key reasons include: 

• 1031 Exchange Eligibility 

• Diversification Across Markets or Asset Classes 

• Professional Property Management 

• Estate Planning and Intergenerational Transfers 

In structured and IRS-compliant TIC offerings, the model allows passive investors to enjoy many benefits of real estate ownership with fewer management burdens.

Get Help from a Qualified Intermediary with Your TIC 1031 Exchange

Tenancy in common is a powerful and flexible method of property ownership that allows multiple individuals or entities to hold distinct, undivided interests in real estate. When structured properly, TIC properties offer important advantages, including potential 1031 exchange eligibility—a critical tool for deferring capital gains taxes and building long-term wealth.

If you're considering a 1031 exchange, exploring tenancy in common properties may open up new investment opportunities while keeping your tax strategy intact. Get help finding a Qualified Intermediary and avoid complications with your 1031 exchange. Contact First American Exchange Company today.