Tenants-in-Common (TIC) in a 1031 Exchange: Sizing Your Slice

Here's a problem every 1031 exchanger eventually runs into. To defer all your tax you have to reinvest a very specific amount — say $900,000 of value and $400,000 of cash — but properties don't come in custom sizes. The building you love is $3 million; the one in your budget leaves you short and hands the IRS a taxable boot. You're stuck between buying too much and buying too little.

A tenants-in-common (TIC) interest is the way out. Instead of a whole property, you buy an undivided percentage of a larger one — sized to the exact dollar. This is the workaround a good qualified intermediary will raise when your numbers don't fit a single deal, and it's worth understanding before you're on the 45-day clock.

If you're new to exchanges, start with the 1031 exchange guide — this post assumes you know the deadlines and the boot rules.

What a tenants-in-common interest actually is

Tenancy-in-common is a form of co-ownership as old as property law. Several owners each hold an undivided fractional interest in the same property: you might own 30% and two partners own 45% and 25%. "Undivided" means you don't own a specific corner of the building — you own 30% of the whole, including 30% of its income, 30% of its expenses, and 30% of its eventual sale proceeds. Each co-owner holds direct title and can sell or will their share independently.

For a 1031 exchange, that fractional structure is the magic: because your ownership can be any percentage, you can dial it to precisely match what you need to reinvest.

The ownership math: sizing your slice to avoid boot

To fully defer, your slice has to clear two bars at once — the same two rules that govern every exchange, just applied to your fraction:

Value testvalue ÷ price

Cash testcash ÷ equity

Your minimum ownership is the LARGER of the two fractions. Value test: your share of the price must cover the value you must replace. Cash test: your share of the equity must absorb all your proceeds.

Say you must replace $900,000 of value and reinvest $400,000 of cash, and the target property is priced at $3,000,000 with a $1,800,000 loan — so $1,200,000 of equity.

• Value test: $900,000 ÷ $3,000,000 = 30%. Own at least 30% and your share is worth $900,000.
• Cash test: $400,000 ÷ $1,200,000 = 33.3%. Own at least 33.3% and your share of the equity absorbs all $400,000.

Take the larger — 33.3% — and both tests pass. Your slice is worth $1,000,000 (comfortably over the $900,000 you needed), your $400,000 goes in fully, and you take on your 33.3% share of the loan. No boot. The TIC ownership calculator runs these two fractions for any deal and tells you which one is binding.

When the value test is the one that binds, your equity share ends up larger than your proceeds — you simply top it up with your own cash, which is never taxed. When the cash test binds, your proceeds deploy exactly. Either way, sizing to the larger fraction is what keeps the exchange 100% deferred.

The line you can't cross: it must not be a partnership

Now the part that trips people up. Section 1031 specifically excludes partnership interests. If your co-ownership looks and acts like a partnership, the IRS can recharacterize it — and your exchange fails.

The IRS drew the boundary in Revenue Procedure 2002-22. It lists the conditions under which a co-ownership is treated as like-kind real estate rather than a partnership. The ones that matter most in practice:

• No more than 35 co-owners.
• Each owner holds direct title to their undivided interest under local law — no entity owns the whole and hands out shares.
• Revenue and costs are shared strictly pro-rata to each owner's percentage.
• Major decisions require unanimous consent — selling, refinancing, or signing a major lease.
• Activities are limited to normal rental operation — maintaining and leasing the property, not running an active business on it.

Stay inside those lines and your interest is like-kind replacement property. Drift toward pooled profits, a manager with broad discretion, or ownership through a single entity, and you're in partnership territory. This is not a place to freelance — structure the deal with a qualified intermediary and a real estate attorney.

TIC versus DST — a quick word

You'll hear about Delaware Statutory Trusts (DSTs) in the same breath as TICs, because both let exchangers buy fractional interests in larger, often institutional-grade properties. The difference:

• A TIC gives you direct title and a real vote — and real responsibility. Up to 35 owners, unanimous consent on big moves. Good when you want control and are co-owning with partners you know.
• A DST is fully passive: a trustee runs everything, you hold a beneficial interest, and there's effectively no owner cap. It relies on a different IRS blessing (Revenue Ruling 2004-86). Good when you want hands-off, professionally managed replacement property and don't want a vote.

Many exchangers facing a deadline with no obvious replacement use one of these two to avoid a failed exchange. TIC when you want a seat at the table; DST when you want none.

The takeaway

A tenants-in-common interest turns the rigid "buy a whole property of exactly the right size" problem into a simple percentage you can tune to the dollar. The math is just two fractions — run them here — but the structuring is unforgiving, because the entire benefit evaporates if the arrangement is deemed a partnership. Get the number yourself, then get the paperwork done by professionals who do this for a living.

General information, not tax or legal advice. TIC structuring for 1031 exchanges is governed by IRS Revenue Procedure 2002-22 and is easy to get wrong — always work with a qualified intermediary and a real estate attorney.