4 Factors to Consider with 1031 Exchanges Involving TIC Agreements

In this article, we are going to discuss four factors to consider when it comes to 1031 exchange involving TIC agreements.

Right of Alienation and Control

An important factor is that each TIC may transfer or encumber their property interest without the consent of the other tenant-in-common co-owners (though this right may be modified if a lender requires the provision as a condition of making a loan).

Splitting of Incomes, Waterfalls and Preferred Returns of Income

Generally, in a tenant-in-common arrangement, profits and losses should be proportionally allocated at the property level, pro rata to each TIC owner’s fractional percentage ownership of the subject real property. Special rights to earnings for a sponsor profit sharing may be indicative of a partnership.

Rights of First Refusal

Sometimes the other tenant-in-common co-owners, sponsor, or lessee may be given an explicit contractual right of first offer or first refusal regarding any co-owner’s exercise of the right to sell, convey, or transfer the co-ownership interest in the property. However, this is a thorny situation and requires the utmost care. Also, if you want to move your TIC interest into a trust or make changes later you may need to get the consent of the other parties to the tenant-in-common agreement. See LTR 200513010

Conducting Business on the Real Property or Offering (too many) Extra Amenities

Please consider this IRC document wherein a partnership was found to exist if co-owners of an apartment building lease space and in addition provide services to the occupants either directly or through an agent. However, if tenants-in-common of farm property passive lease it to a farmer for a cash rental or a share of the crops, they do not necessarily create a partnership. See Treasury Regulation. 301.7701-3(a).

Reach Out to CPEC1031, LLC Today!

A 1031 exchange is your ticket to deferring capital gains taxes when you sell like-kind real estate. Not all real estate qualifies, however. You need to exchange real estate that’s held primarily for use in your business or for investment purposes. There are several other benchmarks you need to hit in order to satisfy the 1031 exchange requirements but that is the basic threshold for engaging in a 1031 transaction. If you have questions about the like-kind exchange process and how it can help you save money in taxes when selling qualifying real estate, don’t hesitate to reach out to CPEC1031, LLC today!

  • Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

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