GO BACK to List of Articles »

Like Kind Exchanges for Tenants in Common Interests
(TICs)

General Rule

The equity of real property you sell or buy held for productive use in trade or business or investment can be exchanged tax-free through a qualified intermediary into replacement property that has equal or a greater level of debt than the relinquished property. No cash can pass through the hands of the seller or else it would be considered boot.

Also the seller must identity replacement property within 45 days including Saturday, Sunday & legal holidays + complete the transaction in 180 days from the time you complete the sale of the relinquished property to the date of completion to acquire the replacement property.

Like kind property includes apartments, condos, commercial, duplexes, land, and rental homes.

IRS Rev Procedure 2002-22

If properly structured, a tenant in common ownership in a property will not be construed as a partnership interest and deemed like-kind if the following are met:

• Not considered a partnership
• Each owner holds title of the property either directly or indirectly (disregarded entity) thru an entity as a tenant in common under local law
• Number of co-owners must be limited to no more than 35 persons. Husband and wife can be treated as a single person
• Co-ownership cannot be a separate entity
• Co-ownership agreement may be entered into to exchange interests, sponsor, lease, partition the land with all the co-owners, with a majority voting for or against each provision
• Co-owners must have right to vote to approve the hiring of manager, sale of property, leases, or creation of blanket lien. More than 50% of undivided interests must approve the provision
• Each co-owners must have rights to transfer, partition, and encumber the co-owner’s undivided interest in a property without agreement or approval by any person
• If property is sold, any debt secured by a blanket lien on overall property must be satisfied and the remaining sales proceeds must be distributed to co-owners.
• Proportionate sharing of profits & losses
• Proportionate sharing of debt
• Ability to issue calls & puts on undivided interests
• Co-owners can only perform activities with repair and maintenance of rental activities
• Co-owners can enter into management and brokerage agreements which must be renewed annually. A co-owner or sponsor can be the manager or broker but not a lessee
• Leasing arrangements must be bona-fide reflecting fair market value
• Lenders cannot be related to co-owners, sponsor, manager, or lessee of the property
• Payments to sponsor of the acquisition of the property must reflect fair market value for the property

Pros of TICs

• Access to high grade properties
• Increased overall real estate experience
• Exact dollar matching with equity
• Diversification
• Deeded interest (fully transferable)
  

Cons of TICs

• No special tax allocations like LLC’s, only allocations based on ownership %
• Real estate risk
• Illiquidity
• Recourse debt

GO BACK to List of Articles »

GO TO TOP