Tenancy-in-Common or fractional ownership programs allow a taxpayer to 1031 Exchange their real estate property for a partial interest in another property. These programs offer several advantages. They can enable a taxpayer to easily diversify their portfolio with other types of real estate, they can help meet time sensitive 1031 Tax Rules, they enable a taxpayer to partially invest in larger properties that they would normally not be able to invest in, and they are also generally managed by a sponsor. A drawback to a TIC or fractional ownership program is the loss of control associated with giving up full ownership of a property for a partial ownership.

There are many companies out there that specialize in 1031 Exchange Tenancy in Common transactions. These companies are referred to as TIC sponsors. Basically these companies purchase institutional grade commercial real estate on behalf of a pool of 1031 Exchange investors. The following is an example of how a 1031 Exchange transaction could play out with a TIC sponsor;

John owns a duplex by the beach that he rents out for rental income. He purchased this property 20 years ago for $150,000 and now it is worth $1,000,000. John is sick and tired of dealing with the upkeep of the property, managing tenants, the fluctuations in rent associated with small properties and would like to benefit from the appreciation in its value. John knows that if he sells the property he will have to pay a large amount to the government in capital gains taxes and depreciation recapture taxes. Since he wants to avoid paying these taxes, and doesn’t necessarily need all the cash from the sale right away, John decides to participate in a 1031 Exchange Transaction.

John knows that finding a replacement property for a 1031 Exchange can be tricky to do by yourself. Instead, he does some research and speaks with accommodators, qualified intermediaries and broker dealers in the 1031 Exchange TIC industry. He finds out that companies specialize in locating properties for investors just like him. These TIC sponsors tie up large commercial real estate assets, install professional property managers and then sell them off to groups of 1031 Exchange buyers. The sponsor receives a fee for providing the service and the investors receive their 1031 Exchange. Not only do the investors defer the payment of tax, but now also receive a steady flow of cash from the property.

John decides that this is a good idea considering his circumstances, takes the $1,000,000 from the sale of his duplex, and becomes an investor in a 1031 Exchange Tenancy in Common transaction. Johns $1,000,000 investment buys him a 10% ownership stake in a large apartment building in Seattle. With his exchange John defers the payment of capital gains taxes and depreciation recapture taxes. John no longer has to deal with the troubles and inconveniences of managing a property himself and can benefit from the appreciation in value of his duplex by receiving steady cash flow on his larger investment.