TIC Roundtable Discussion: Fractionalized, but Not Fractured
Understanding Fractionalized Ownership Without Fragmentation
Tenant-in-Common (TIC) ownership allows multiple investors to hold direct, undivided fractional interests in real estate. Unlike partnerships or joint ventures, TIC owners are recognized as direct property owners, each with rights to income, appreciation, and transferability of their interest. The phrase “fractionalized, but not fractured” captures the balance TIC structures must maintain: offering individual ownership rights while preserving unified management to prevent fragmentation of decision-making.
For investors using 1031 Exchanges, TIC ownership can be a valuable tool— if structured carefully to comply with IRS guidelines.
IRS Guidance: Revenue Procedure 2002-22
The IRS outlined in Revenue Procedure 2002-22 when TIC interests may qualify as real property for 1031 purposes. Key requirements include:
No partnership status — Co-owners must not operate as a business entity.
35-owner guideline — TICs generally should not exceed this limit.
Proportional rights — Income, expenses, and debt must be shared in proportion to ownership.
Unanimous consent for major decisions — Such as sales, refinancing, or significant leasing changes.
Independent management — Co-owners may hire a property manager, but the manager must be replaceable and not act as a partner.
Transferability — Owners should be able to transfer their interests, subject to reasonable restrictions (e.g., rights of first refusal).
These rules aim to ensure TIC interests are respected as direct real estate ownership, not as disqualified partnership interests.
Balancing Individual Rights and Collective Interests
Each TIC owner has the right to transfer their interest, receive income, and vote on major property decisions. However, these rights must be balanced against the need for unified property management. Effective TIC structures accomplish this by:
Establishing clear co-ownership agreements to prevent disputes.
Creating reserve funds and capital contribution protocols to ensure ongoing maintenance.
Designing transfer restrictions that preserve marketability while protecting existing owners.
Providing communication protocols to keep owners informed and prevent delays in decision-making.
Professional Management and Operational Excellence
Day-to-day operations in TIC arrangements are usually delegated to professional property managers. Their responsibilities typically include:
Coordinating tenant relations, maintenance, and repairs.
Providing transparent financial reporting.
Facilitating unanimous consent processes for major decisions.
Ensuring that management remains consistent with IRS restrictions to avoid reclassification as a partnership.
Financial Management and Cash Flow
Financial discipline is central to TIC compliance and investor satisfaction. Best practices include:
Proportionate allocation of income, expenses, and debt service.
Establishment of reserve accounts for repairs and capital projects.
Efficient cash flow systems that distribute income while retaining needed operating capital.
Detailed recordkeeping to support IRS scrutiny and investor transparency.
Exit Strategies and Succession Planning
TIC arrangements should plan for ownership changes while protecting continuity. Common provisions include:
Right of first refusal for existing owners when a TIC interest is sold.
Independent appraisals to determine fair market value.
Procedures for replacement owners to ensure compatibility.
Succession planning for events like death, incapacity, or long-term disposition of the property.
Risk Management and Compliance
The IRS closely examines TIC arrangements to ensure they are structured for legitimate investment purposes rather than tax avoidance. Risks include:
Deadlocks due to unanimous consent requirements.
Owner defaults on capital calls.
Potential reclassification as a partnership if management activities exceed IRS allowances.
Mitigation strategies include comprehensive insurance coverage, well-drafted legal agreements, and professional oversight.
Technology and Market Trends
Modern TIC ownership increasingly relies on technology to facilitate communication and compliance. Tools such as secure online portals, electronic voting systems, and digital financial reporting enhance transparency and documentation.
Trends shaping TIC ownership include:
Growing investor interest in fractionalized ownership as an alternative to partnerships.
Improved governance practices that reduce risk and streamline decision-making.
Potential innovations such as blockchain and smart contracts to enhance transparency and liquidity.
TIC ownership demonstrates that real estate can be fractionalized without being fractured when supported by proper structuring, professional management, and IRS-compliant governance. For investors considering 1031 Exchanges, TICs can offer access to institutional-quality properties while preserving the tax-deferral benefits of like-kind exchanges.
Success depends on clear agreements, balanced rights and responsibilities, and a commitment to both compliance and collaboration.
This article is for educational purposes only and does not constitute tax or legal advice. Consult with qualified professionals before entering into any TIC or 1031 Exchange transaction.
