Why TIC matters for 1031 exchanges
Partnerships and LLCs face a structural problem with 1031 exchanges: only the entity itself can exchange — individual partners or members cannot. With a tenancy-in-common (TIC) arrangement, each co-owner holds an undivided fractional interest in the property. Because each interest is held directly rather than through an entity, each co-owner can conduct their own 1031 exchange independently.
A co-owner may sell their TIC interest and do a 1031 into their own replacement property, while another co-owner takes cash (triggering gain). This flexibility makes TIC a common structure for investors who want to align on a property but retain individual exit options.
IRS requirements under Rev. Proc. 2002-22
The IRS issued Rev. Proc. 2002-22 to provide a safe harbor for TIC arrangements in 1031 exchanges. Key requirements: no more than 35 co-owners; decisions about the property require unanimous or at least supermajority approval; co-owners cannot share profits in a manner that looks like a partnership; and the arrangement cannot issue interests that are treated as equity securities.
If a TIC arrangement looks like a de-facto partnership — with a managing co-owner making most decisions, shared profits proportional to labor, or centralized control — the IRS may reclassify it, eliminating each owner's ability to do individual exchanges.
The drop-and-swap technique
When partners in an LLC want to exit a property via 1031 exchange, a common strategy is to first convert the LLC to a TIC structure by distributing undivided interests to the individual members (the \"drop\"), then have each member do their own exchange (the \"swap\"). The IRS scrutinizes this, particularly if the drop and swap happen close together — courts and rulings have found that a holding period of at least one to two years between the drop and the swap strengthens the argument that the TIC interests were held for investment.
Frequently asked questions
Can individual partners each do a 1031 exchange from a partnership sale?
Generally no — a partnership does a 1031, not individual partners. But if the property is first held as TIC and each partner holds an undivided interest, each can exchange independently.
How many co-owners can participate in a TIC 1031 exchange?
Rev. Proc. 2002-22's safe harbor caps TIC co-owners at 35. Exceeding this limit risks the IRS treating the arrangement as a partnership.
Does a TIC interest itself qualify as like-kind property?
Yes — an undivided interest in real property held for investment is like-kind to other real property under IRC 1031, per Rev. Rul. 73-476.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.