By Christina S. Porter

A Tenant in Common (TIC) property generally qualifies as a replacement property for a 1031 transaction under the Internal Revenue Service Revenue Procedure 2002-22. Under this procedure there are 15 factors which determine whether a TIC interest qualifies as like kind replacement property. In general, the TIC investment must not be a partnership and each owner must have deed ownership, retain control over the management and maintain the ability to change management companies at least once a year.

IRS Revenue Procedure Section 2002-22 sets forth the conditions under which the IRS will issue favorable letter rulings that certain TIC investments qualify as like kind for a 1031 exchanges. When TICs were first offered as replacement properties in 2002 sponsors were more likely to request that the IRS issue individual letter rulings that would assure the sponsor and the investor that the TIC was 1031 compliant. As TICs have become more commonly accepted few TIC sponsors seek such letter rulings.

Instead, some TIC sponsors obtain opinions from their attorneys that the transaction is 1031 compliant. Significantly, these opinions are not rendered to the investors and can only be relied upon by the TIC sponsor. Some TIC Sponsors do not obtain any legal opinions. The problem with this arrangement is that the investors can end up paying for the opinion and are still left with uncertainty that the 1031 nature of the truncation could be challenged.

Since 2002, at least 10 billion dollars ($10,000,000,000 as of 2006) has been invested in a in tenant in common properties. The majority of this equity is held by individual investors, often for retirement doing 1031 exchanges. The aging demographic of the American population has created an industry devoted to providing TIC investments to retiring owners of smaller commercial properties, especially those who wish to avoid management responsibilities, earn passive real estate income and defer the payment of capital gains taxes and depreciation recapture.

Investors need to carefully review all documents provided by sponsors and have their attorney/accountant review any investment to make sure it fills their unique needs. This includes fully understanding the nature and risk of the real estate being invested in and whether or not the investment is suitable for a 1031 exchange.

Contact Christina Porter at (877) 4TM-1031 or Christina@tm1031exchange.com. TM 1031 Exchange assists investors and planning and executing real estate investment strategies.