How to 1031 Exchange Property with Tenants in Common (TIC)

Considering trading with co-owners? You can—if you play by the rules. If you own property in Tenants in Common (TIC) status, you’ve got a unique chance to tap into the tax-deferred advantages of a 1031 exchange California. The catch? Figuring out how to play within rules of the IRS and co-owner agreements without triggering a taxable event.

This is how to effectively trade a TIC into a 1031.

• Learn What TIC Ownership Is

With property being held as Tenants in Common, you and the co-parties each have an individual, undivided interest in the property. In other words, you can sell your interest individually, as opposed to a joint tenancy. That individual control is what makes TICs contenders for individual 1031 exchanges—if you do them right.

• Ensure the Property Meets the Standards

Not all joint real estate agreements qualify. The IRS would like to see each TIC owner listed on the deed, ideally with percentage rights to income and control. If the ownership starts looking like a partnership (with a joint LLC or operating agreement), your 1031 exchange qualification will be under threat.

• Get Along with All Co-Owners (Or don’t)

The best part about TICs is that you don’t necessarily have to go along with everyone else lockstep as an owner. If one owner wants to trade in and the other wants to cash in, that’s okay. But timing is crucial—if one player sells out before the exchange, it will put the tax deferral at risk for everyone else. Think about hiring a Qualified Intermediary (QI) to make difficult split decisions on your behalf.

• Present the Sale & Replacement Appropriately

When you do a 1031 exchange California, the IRS requires a “like-kind” exchange. For TIC investors, this could mean replacing your undivided interest in one property with an equivalent interest in another. You cannot put your proceeds into a common LLC after the exchange because it could taint the transaction. The best move is to transition from TIC to another TIC or even a Delaware Statutory Trust (DST).

• Be Conscious of Boot and Timeline Failures

If all or part of the transaction is a debt payoff or cash-out (referred to as “boot”), that amount can potentially be taxable. Don’t forget the 45-day identification rule and the 180-day close rule either. With multiple co-owners, waiting can add up quickly, so leave some cushion and utilize a facilitator with TIC exchange experience.

Conclusion

Swapping property with Tenants in Common brings an extra level of complexity to the already convoluted process—but it’s totally doable. Panicking, having the wrong intermediaries, and offending the IRS are all ways to ensure you won’t make it out of the exchange with a successful 1031 exchange California and significant tax savings. Just be sure that everyone on the deed is on board—or at least on their own, IRS-approved trajectory.