Note: You must set up an exchange before closing on a property. It is important to note that the following are scenarios that different taxpayer entities may encounter in regards to 1031 exchanges for tenants in common.
A frequent strategy for acquiring and operating investment properties is by purchasing the asset with others: tenancy in common (TIC). This strategy is commonly used to maximize their purchasing power and reduce their risk liability. A general guideline for all partnerships and 1031 exchanges is that partnership interests cannot be exchanged. However, the Internal Revenue Service has clarified that a federal tax partnership does not include mere co-ownership of property where the owners’ activities are limited to keeping the property maintained, in repair, rented, or leased (Under 1.761-1(a) and 301.7701-1 through 301.7701-3). Thus, a partnership can perform a 1031 exchange if the partnership is the exchanger, however, exchanging partnership interests is strictly prohibited.
In this post, we are going to discuss different tenancies in common situations and possible scenarios they may encounter while trying to set up a 1031 exchange. If you are trying to determine the advantages and disadvantages of the different tax entities and their effect on your situation, it is recommended that you consult with your CPA or legal counsel.
Tenants in Common
When two or more individuals or tax entities own real property, there are a few different scenarios that can occur. They could enter a 1031 exchange with a focus on the continuation of ownership, where all individuals will need to agree and sign into a 1031 exchange with the property that they are selling. When one individual wants to cash out, while the other individual wants to enter a 1031 exchange, some options can be pursued.
Continuation of Ownership
In this scenario, when two or more individuals hold title as tenants in common, and all taxpayers who are selling the property wish to enter a 1031 Exchange, then they can set up a 1031 Exchange with a qualified intermediary and continue the ownership into new property(s) as long as they follow the 1031 Exchange rules.
One Owner Wants To Cash Out
When two or more taxpayers own real property, and at least one taxpayer wants to cash out of the sale, the individual who wants to do a 1031 Exchange must set it up before closing on the property. The exchanger can then purchase a property(s) while the other member(s) receives their allotted funds that are subject to tax liability. If two individuals are selling a property for $350,000, and each of them owns a 50% interest in the property as tenants in common, the individual who would like to enter a 1031 Exchange will have a relinquished property value of $175,000, and to get the full benefit of a 1031 Exchange the individual will need to equalize their exchange by purchasing a property(s) that is greater than or equal to $175,000 minus qualified exchange expenses.
Please visit our website or call (239)-333-1031 to see if your investment, business, or rental property qualifies today.
Written by Alex Moore
Midland 1031 Associate, Midland IRA, Inc.