The Ultimate Guide To Tenancy In Common Structures For 1031 Exchanges

Selling one investment property and eyeing another? There’s a way to do that without getting slammed by the IRS. A 1031 exchange lets investors postpone capital gains taxes, sometimes up to 20%, if they reinvest the profits into a like-kind property.

It’s one of the most effective strategies for keeping more of your gains working for you. From our experience, many real estate investors overlook just how powerful this tool can be when combined with tenancy in common structures for 1031 exchanges.

It’s an often underused but flexible option that allows for fractional interest in real property without giving up control.

If you’re a high-net-worth investor, a real estate advisor, or someone trying to make the most of commercial real estate, this guide is built for you.

We’ll break down how these ownership structures work, how to align them with your 1031 exchange goals, and what potential roadblocks to watch out for. It’s clear, concise, and loaded with insights you can actually use.

If you caught our last article on LLC vs limited partnership commercial real estate, this piece builds on that discussion.

It also pairs well with our core resource on commercial real estate investment structures, which covers broader strategies investors are using in 2025 and beyond.

Let’s get started!

Short Summary

• Tenancy in Common structures for 1031 exchanges allow multiple investors to hold fractional interest in a single property, offering flexibility and tax deferral.
• TIC investments satisfy IRS requirements under the Internal Revenue Code for like-kind exchanges, making them a popular real estate ownership strategy.
• The process involves working with qualified intermediaries, adhering to strict timelines, and following IRS Revenue Procedure guidelines.
• Compared to Delaware Statutory Trusts, TICs offer direct ownership, while DSTs provide professional management and lower minimum investment amounts.
• Common challenges include coordination with multiple investors, non-recourse debt, and planning for a clean exit strategy.

Understanding Tenancy In Common For 1031 Exchanges

There’s a reason more investors are exploring tenancy in common structures for 1031 exchanges. They offer flexibility, control, and a smart way to share ownership of real property while still meeting IRS rules to defer capital gains taxes.

Here’s what we’ve learned from walking investors through these deals.

What Is A Tenancy In Common (TIC) Structure?

A TIC ownership structure allows multiple parties to hold an undivided interest in the entire property. That means everyone owns a slice, but no one owns any specific part. It’s not like dividing rooms in a house, though. You all legally share the whole asset.

In our experience, we’ve seen individual investors pool funds to buy commercial real estate worth $5 million or more. Each person holds a percentage interest, and it’s all reflected on title. They each get their share of income, tax benefits, and appreciation.

Why TICs Are A Solid Fit For 1031 Exchanges

The IRS recognizes fractional ownership in a TIC as qualifying real estate ownership for like kind exchange purposes. So when you’re moving from a relinquished property to a replacement property, a TIC property can check all the boxes.

We’ve worked through scenarios where multiple investors sold smaller rentals and reinvested their remaining sales proceeds into a higher-value TIC structure. That allowed them to grow their portfolios without taking on a solo asset. Smart move.

How TICs Differ From Other Ownership Types

A quick comparison: joint tenancy comes with rights of survivorship and often isn’t flexible for 1031 exchange purposes. TICs, on the other hand, offer individual tax reporting and ownership transfer without messing up the whole agreement.

Rights And Responsibilities In A TIC Agreement

Every co-owner signs a co ownership agreement (sometimes called a TIC agreement) that lays out decision-making rules, expenses, and exit strategies.

• Each owner is responsible for their share of taxes and debt.
• Everyone must agree on major decisions; unanimous approval is usually required.
• Local regulations and local law may impact how that agreement is structured.

We always recommend reviewing a TIC’s ownership interest terms carefully. For example, one co-owner may want to sell early, and if that happens, the rest need to be prepared.

Implementing TIC Structures In Your 1031 Exchange Strategy

Setting up a TIC ownership structure for your 1031 exchange isn’t complicated. But make no mistake: it still requires planning, paperwork, and precision with timing.

Here’s how we typically guide investors through the process, from selling the relinquished property to closing on the replacement property with multiple investors involved.

Step-by-Step: From Sale To Exchange Using a TIC

The basic framework looks like this:

Step 1. Sell your relinquished property and place the funds with a qualified intermediary (you can’t touch the cash).

Step 2. Identify a TIC property as your replacement property within 45 days. You can list up to three properties or use the 200% rule.

Step 3. Work with the TIC sponsor or real estate advisor to review the ownership structure, due diligence materials, and financials.

Step 4. Sign a co ownership agreement outlining responsibilities, percentage interest, voting rights, and the terms of your undivided interest.

Step 5. Close on the deal within 180 days of selling your original property.

For example, an investor might sell a fourplex in Phoenix and use their exchange funds to buy into a Class A commercial real estate project in Austin with ten other investors, each owning a fractional interest.

Required Documentation And IRS Guidance

You’ll want to follow the IRS’s Revenue Procedure 2002-22, which outlines how tenancy in common deals must be structured for income tax purposes. It’s not technically law, but it’s what the IRS expects if you want to defer capital gains taxes.

Key documents typically include:

• Purchase agreement
• TIC subscription or operating documents
• TIC agreement or co-ownership agreement
• Lender documents (if there’s non recourse debt involved)
• Assignment of benefits or escrow instructions

Role Of Qualified Intermediaries

The qualified intermediary is critical. They’re the middleman who holds your funds and ensures you don’t violate the Internal Revenue Code. Without one, your 1031 exchange becomes a taxable sale. No second chances.

Timeline Considerations

Stay sharp on deadlines. You’ve got:

• 45 days to identify the replacement property
• 180 days total to complete the exchange

There have been situations where a last-minute change caused investors to miss the 45-day mark, losing the tax benefit. So always have backup properties in mind.

How Undivided Interests Work With Multiple Investors

With a TIC property, each owner gets an undivided fractional interest in the entire property. You don’t own Unit A or Floor 3; you own a portion of the whole thing, along with your share of the profits and expenses.

That’s what makes tenancy in common so attractive to property owners looking to scale up without running solo. It’s a solid way to diversify while staying eligible for tax shelters like the 1031 exchange.

TIC Vs. Delaware Statutory Trusts: Which Is Right For You?

When it comes to 1031 exchanges, investors often narrow it down to Tenancy in Common (TIC) or Delaware Statutory Trusts (DSTs). Both are solid options, but the right fit depends on your style, goals, and appetite for involvement.

Key Differences Between TIC And DST Structures

Both TICs and DSTs qualify under IRS rules for like-kind exchanges, but they operate very differently:

• TIC investors hold direct ownership in real property. You’re on the deed, with a recorded interest.
• DST investors own a beneficial interest in a trust, not the physical property itself.

That shift changes everything, from control to liability to what you can expect day to day.

Advantages Of TIC Structures

• Direct ownership means more say in decisions like refinancing, selling, or leasing.
• Investors have access to cost segregation, depreciation, and real estate tax benefits directly.
• TICs are ideal for those who want to be hands-on or at least have a vote.

We’ve seen examples where investors chose TICs to pool funds into a high-end retail center, sharing both the responsibilities and upside. The key benefit? Everyone had a voice at the table.

Benefits Of DSTs

• Professional management handles leasing, repairs, and tenant issues—no phone calls about leaky faucets.
• Lower minimum investment amounts, sometimes as low as $25,000, make them accessible to more investors.
• Great for folks nearing retirement or shifting to passive income strategies.

Many investors favor DSTs when easing out of direct ownership, preferring steady returns without day-to-day involvement.

Decision Factors To Consider

• TIC may suit you if you want greater control and are investing a larger amount.
• DSTs are a fit for those who prioritize diversification, simplicity, or are looking at institutional-grade assets like healthcare or multifamily portfolios.

Management And Approval Requirements

TICs often require unanimous approval for major decisions. That can slow things down. DSTs, on the other hand, don’t require investor votes; sponsors make the calls.

So, if you’re debating between the two, ask yourself this: Do you want control, or do you want convenience? Your answer might tell you exactly where to go.

Navigating Common Challenges With TIC Investments

Like any investment model, Tenancy in Common structures come with their own learning curve. Here’s what to watch out for so you’re not caught off guard.

Critical Pitfalls to Avoid

• Decision-making can be slow. All major actions, like selling, refinancing, or leasing, often need unanimous approval.
• If one co-owner defaults, it can affect the entire group’s performance and reputation.

In one case we studied, an investor entered a TIC with people they barely knew. Things went south when one party stopped contributing their share of maintenance costs, leaving the rest scrambling.

Exit Strategy Considerations

Having a clear exit plan is essential. Some TIC agreements restrict when and how you can sell your interest.

Make sure to:

• Review the co-ownership agreement upfront.
• Understand buyout provisions and timelines.
• Plan your next move before market conditions shift.

Financing Challenges With Non-Recourse Debt

Getting a lender on board can be tricky. TICs often rely on non-recourse loans, which may come with tighter terms and less flexibility.

Lenders typically limit TIC participation to 35 investors or fewer. That cap can make or break your strategy.

Importance Of Carefully Selecting Co-Owners

Choose your co-investors like you’d choose a business partner. Compatibility matters.

Ask:

• Do they share similar risk tolerance?
• Can they commit long-term?
• Are they financially reliable?

Picking the right group might just be the most important decision in the whole process.

Final Thoughts

Tenancy in Common structures for 1031 exchanges can be a solid choice when done right. You get flexibility, potential tax savings, and shared ownership in valuable real estate. Be careful, though. It takes careful planning and the right people around the table.

If you’re thinking about using a TIC in your next move, make sure you understand the structure, the risks, and how it fits into your goals. Need help sorting it out or curious about other options? Feel free to reach out or head back to our homepage for more insights and guidance.