Craig C. Johnson, executive vice president and chief operating officer, Aries Capital Inc.

As published in Scotsman Guide's Commercial Edition, July 2005.

Tenancy-in-common (TIC) real-estate ownership is a structure in which two or more people have undivided fractional interests in an asset and ownership shares are not required to be equal. This method of ownership is fast becoming a popular choice among real-estate investors seeking replacement property under the Internal Revenue Code (IRC) Section 1031 tax-deferred exchange.

As 1031 investors are aware, the code’s harsh time restriction is a big hurdle facing a successful exchange. Investors, however, now have a better opportunity to pick and choose from the numerous 1031-TIC syndications available. TIC ownership also allows investors to diversify their 1031 exchanges into multiple properties and to have ownership stakes in larger, institutional-quality properties.

How does TIC work?
Under a TIC, also known as co-ownership of real estate or fractional ownership, investors receive an individual deed for their undivided percentage interest in the entire property. Each investor is considered a direct owner of the real estate. Through TIC ownership, the average person is able to enjoy the convenience of owning an institutional-type property with a minimum investment. The TIC program is a “coupon-clipper” or “mailbox-management” investment.

These programs, however, come with a definite lack of control. While the nature of the TIC ownership structure allows for significant control of the property, as compared to general and limited partnerships, the opportunities often are packaged with management and debt-financing in place. A TIC investment offers the passive investor superior efficiencies in identification, financing and closing of investment-type properties. A professional asset- and property-management company (the “lessee”) typically handles the day-to-day management and ultimate disposition of the real estate.

TIC history
Residential-real-estate owners have used TIC ownership for more than 25 years. Deferred exchanges came to the real-estate community in 1979 with the U.S. Court of Appeals decision in the Starker case (602 Fed.2d 1341). Today, Section 1031 is one of the only tax-planning provisions left for developers and property owners to defer their capital-gains taxes to the future.

The 1979 decision allowed for tax deferrals on rental, commercial, investment or business real-estate property exchanged only for acquisition of future like-kind property. After five years of uninterrupted exchanges, Congress stepped in again. By enacting Section 1031(a)(3), Congress limited the time frame available for exchanges; qualifying replacement property must be designated within 45 days after the sale of the old property, and exchanges must be completed within six months. Then, with the Tax Reform Act of 1986, Congress eliminated all capital-gains deductions and also increased the capital-gains taxes for corporations.

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