TIC STructure

 Section 1031 Exchange rules provide that tax free treatment is not available to an exchange of interests in a partnership. However, property held in by co-owners in a tenancy-in-common arrangement or "TIC" is eligible for 1031 treatment. With a tenancy in common, each owner has an undivided interest in the purchased property, which gives each tenant in common an equal right to use the property, even if the fractional or percentages of interests are not equal among the owners. Under IRS rules, among other requirements, a valid TIC arrangement must satisfy the following:

1. Tenancy in Common Ownership. Each of the co-owners must hold title to the Property (either directly or through a disregarded entity) as a tenant in common under local law. Thus, title to the Property as a whole may not be held by an entity recognized under local law. 

2. Number of Co-Owners. The number of co-owners is limited to 35. 

3. No Treatment of Co-Ownership as an Entity. The co-owners cannot act as if they are part of a partnership or other organized business entity. 

4. Co-Ownership Agreement. The co-owners to enter into an agreement that governs property.

5. Voting. Essentially, any significant action taken with respect to the tenants –in common arrangement must meet with the approval of all of the members. 

6. Restrictions on Alienation. Fundamental to the ownership of real property is the right of the owner to transfer, encumber or otherwise dispose of such property. 

7. Sharing Proceeds and Liabilities upon Sale of Property. All financing on the property must be satisfied from the proceeds of sale.  Any remaining amounts must be distributed to the co-owners in proportion to their ownership interest. 

8. Proportionate Sharing of Profits and Losses. All expenses and revenue of the property will be shared by the owners in proportion to their ownership interest. 

9. Proportionate Sharing of Debt. Any lien on the property must be allocated to the owners in proportion to their interests.