Tenancy in Common (TIC) Structures: A Tax Deep Dive

Life gets complicated when you use other people's money to make money.

Today we're looking at a common wrinkle in real estate tax: using a Tenancy in Common (TIC) structure to preserve a 1031 like-kind exchange.

What Is a Tenancy in Common (TIC) Structure?

A tenancy in common is a co-ownership arrangement where each owner holds an undivided fractional interest in real property. Unlike a partnership interest, a TIC interest qualifies for Section 1031 like-kind exchange treatment — making it the go-to structure when some partners want to sell and others want to defer gain.

Think of a TIC as a Joint Venture for real estate. It's a workaround for 1031 exchanges when partners aren't aligned — some want to sell, others want to roll proceeds into a new property.

While TICs usually keep their own set of books, the TIC itself does not file a separate tax return. Instead, individual owners report their share of TIC activity on their own returns based on their ownership percentage.

How Is a TIC Used in a Drop-and-Swap Transaction?

In a drop-and-swap, an existing partnership distributes property into a TIC so each partner holds a direct fractional interest. Partners wanting cash sell their TIC share and recognize gain; partners wanting deferral route proceeds through a Qualified Intermediary for a 1031 exchange. The key is converting a non-eligible partnership interest into an eligible TIC interest.

TICs are most commonly used in "drop and swap" transactions:

1. Existing partnership drops current property into a TIC
2. Partnership distributes TIC interests to existing partners at their basis
3. The TIC sells the dropped property
4. Partners who want cash recognize gain and receive proceeds
5. Partners who want to defer direct their cash to a Qualified Intermediary for the 1031 exchange

The primary motivation is converting a partnership interest (not 1031 eligible) into a TIC interest (1031 eligible). But this must have genuine business purpose beyond just the tax benefit.

Which Court Cases Define the Rules for TIC Structures?

The leading case is Chase v. Commissioner (1989), where the Tax Court collapsed a drop-and-swap because partners negotiated with buyers while still inside the partnership. The court found an "overarching plan of sale" and attributed the transaction to the partnership — destroying 1031 eligibility for every partner involved.

The bar to beat is Chase v. Commissioner (1989). Partners owning an apartment complex structured a drop-and-swap, but they were simultaneously dealing with buyers and brokers within the partnership. The court saw an "overarching plan of sale" and attributed the transaction to the partnership rather than the TIC — destroying the 1031 eligibility.

The lesson: plan ahead and keep business motivation one step ahead of tax motivation.