In A Nutshell: Tenancies In Common & 1031 Exchanges

Tenancy In Common (TIC) is a way for two or more individuals to have an undivided fractional ownership interest in a single property. With a TIC, each owner has individual rights and obligations related to the property. These rights equal the proportionate share of the owner’s interest.

Having an ownership interest in a TIC gives an investor the right to his or her proportionate share of net income, tax benefits and appreciation. The TIC owner is treated similarly to a fee simple owner and receives an individual property deed and title insurance for his or her share of the property. A TIC owner may bequeath his or her interest to any beneficiary upon the owner’s death.

This direct interest in real estate TIC ownership also qualifies as “like-kind” real estate for 1031 exchanges, making TICs an important part of the 1031 exchange universe. To shield themselves from personal liability arising from holding direct title to property, most TIC investors set up Limited Liability Companies (LLCs) for the purpose of TIC ownership.

Benefits Of A Tenancy In Common

One of the advantage of Tenancy In Common ownership of investment property is that the individual investors each maintain the ability to have a say in the day-to-day operation of the property, including when and under what terms to eventually sell the investment. Contrast this to Delaware Statutory Trust ownership where individual investors cede this authority to a third-party.

Also, since buyers are able to pool their resources in a TIC, this gives the TIC collective much more buying power than an individual investor may have. This opens up a wider selection of potential investment properties, with greater growth potential.

Finally, in cases where the TIC is offered as a security, the TIC investor also enjoys the benefits of securitized real estate.

Risks Of Tenancy In Common

Although very popular, Tenancy In Common ownership presents a unique set of challenges that any investor should thoroughly consider beforehand. Beyond the typical risks associated with investing in real estate, when ownership involves multiple investors there is always the risk of conflict or disagreement among the owner pool.

Any major decision requires the unanimous approval of all owners, which can be problematic if fast decisions are required. While most TICs contain a buy-out provision for dissenting owners, it is usually not a fast or easy process. The time it takes to resolve disagreements among owners can often cause the TIC to miss out on lucrative selling opportunities.

Likewise, if the TIC property is mortgaged, there is also the risk that a change in an individual owner’s financial status may adversely impact any future refinancing. Unlike Delaware Statutory Trusts, when a TIC seeks financing, the lender will scrutinize the individual credit of each TIC investor.

To find out how we can help you find and close on your next 1031 exchange property or to learn more about the exchange process and our qualified intermediary services, please visit our website.