What Exactly is the Tenants in Common Exchange?

Tired of playing landlord and doing everything yourself? Maybe you’re looking to sell your apartment building and buy something else but don’t have enough funds or are dreading the tax consequences. Fortunately for you, you could opt for a 1031 Tenants in Common Exchange.

With a 1031 TIC exchange offered by firms such as 1031ex.com, you could sell your investment property, still earn income from a higher quality property this time, avoid taxes, and do away with the burden of being a landlord.

How the 1031 Tenants in Common exchange works

Let’s say that you sell an apartment building that you have owned for around 18 years and you’ve built up about $480,000 in equity. Depending on how much debt you have left on that property, the cost of a new investment property could be about a million dollars.

Although your $480,000 is a nice sum, that won’t get you a higher quality investment property. But if you choose to invest in a tenants in common property, your $480,000 could buy you interest worth a million dollars in a $28,000,000 investment property.

If you become a TIC property co-owner, you would be allotted a portion of the net income from that property, and be given a separate deed for your particular share of that property. You’d have the legal right to transfer or alienate your share without the need to get permission from your co-owners.

You would hold unequal interest and could acquire your interest should you wish to. This is what sets TIC agreements from other joint ownership agreements such as a partnership.

Why the distinction is important

This distinction is crucial because if a property is categorized as a partnership instead of tenants in common, it won’t qualify for the 1031 TIC exchange. Do note though that the classification of a property’s ownership agreement is usually a case-to-case basis since it’s common for ownership agreements to overlap with other types of agreements.

What you need to remember is that the IRS, Internal Revenue Service, treats tenants in common differently because its co-owners are capable of transferring – therefore, exchanging – their interest in the property freely, which isn’t the case with other joint ownership agreements.

How to implement the 1031 Tenants in Common exchange

If you are seriously considering a 1031 TIC exchange, you need to be aware of the specific guidelines set forth by the IRS. Otherwise, you run the risk of buying into a TIC property that you couldn’t use for an exchange.

It’s likewise immensely vital that you know about the various state laws that might affect your transaction in certain ways. That said, consult a 1031 exchange specialist or qualified intermediary to figure out your options.