On this More More Monday, we are discussing tenant-in-common interests.
It is possible to sell or acquire a tenant-in-common interest in property as part of a 1031 tax-deferred exchange. A tenant-in-common interest provides the owner with fee interest in the property and it may be exchanged for any other real property provided both the relinquished and replacement properties are held for business use or investment.
A tenant-in-common interest exists when real estate is owned by two or more persons with no right of survivorship. Each co-owner has the right to sell, mortgage or give away their respective interest. There is no need for each co-owner to have an equal percentage. The percentages of ownership are based on the amount invested by each co-owner.
When selling or buying a tenant-in-common interest, it is important to remember the exchange agreements and closing documents must reflect just the percentage of ownership of the Exchanger. This must also be reflected in the 45-Day Identification letter to ensure the Exchanger has acquired exactly what was identified.
When acquiring a tenant-in-common interest as replacement property, the percentage of ownership must have a fair market value that is equal or greater than the net selling price of the relinquished property and all of Exchanger’s net equity must be reinvested.
When acquiring with a co-owner, one must be careful not to enter into any partnership agreement or provide services that would have the tenant-in-common interest be deemed a partnership as a partnership interest does not qualify for 1031 tax-deferral treatment. (An entire partnership can exchange but one partner cannot exchange his/her partnership interest.)
Acquiring with a co-owner provides an Exchanger the opportunity to acquire a more valuable property with greater income potential than he/she may be able to purchase on his/her own. Just one more benefit afforded under Section 1031.