Tenants in Common (TIC)
Beyond limited partnerships, the SIE also tests another direct participation program (DPP) structure: tenants in common. While less complex than limited partnerships, TIC arrangements have unique characteristics, especially their connection to tax-deferred exchanges.
What Is Tenants in Common?
- A co-ownership arrangement where each investor holds an undivided fractional interest in a property
- Each owner holds a separate deed for their ownership share
- Not a separate legal entity (unlike a limited partnership)
- Ownership shares do not need to be equal
Exam Tip: Gotchas
Each TIC owner holds a separate deed and reports income and expenses on their own tax return. TIC is not a partnership and does not file a partnership return.
Key Characteristics
| Feature | Tenants in Common |
|---|---|
| Ownership | Undivided fractional interest |
| Deed | Each owner holds a separate deed |
| Legal entity | Not a separate entity |
| Transfer rights | Can sell, transfer, or bequeath independently |
| Tax treatment | Pass-through (each owner reports their share) |
| Consent to sell | Not required from other co-owners |
Exam Tip: Gotchas
Ownership shares in a TIC do NOT have to be equal, and no co-owner's consent is required to sell or transfer another co-owner's share.
Transfer and Independence
One of the defining features of TIC ownership:
- Each investor can sell, transfer, or bequeath their interest independently
- No need to get approval from other co-owners
- This independence distinguishes TIC from joint tenancy (where right of survivorship applies)
Exam Tip: Gotchas
TIC has no right of survivorship. At death, a co-owner's interest passes through their estate (probate), not automatically to the surviving co-owners. Don't confuse TIC with JTWROS.
Section 1031 Exchanges
TIC interests are popular for Section 1031 exchanges (tax-deferred like-kind exchanges):
- A 1031 exchange lets an investor defer capital gains taxes by exchanging one investment property for another
- An investor can complete a 1031 exchange by acquiring a TIC interest in a replacement property (instead of buying 100% of a property)
- The IRS limits TIC arrangements used in 1031 exchanges to no more than 35 co-owners
- This makes TIC a practical way for investors to diversify into larger commercial properties through tax-deferred exchanges
Exam Tip: Gotchas
Tenants in common is NOT a separate legal entity, unlike a limited partnership. Each TIC owner reports income and expenses directly on their own tax return. Also, don't confuse TIC with "joint tenancy"; TIC has no right of survivorship, and interests can be transferred independently.
Now let's pull together the key characteristics that apply across all DPP structures.