Property owners selling an appreciated California asset are routinely pitched tenant in common interests as replacement property, usually by the sponsor who assembled the deal. A tenant in common 1031 exchange in California can work. It fails when the co-ownership drifts into something the IRS treats as a partnership interest, or when a single co-owner exercises a partition right that California law now makes easier to enforce. Borna Houman Law reviews TIC structures for investors and property owners across Los Angeles County before the exchange period starts running.
Key Takeaway: A tenant in common interest qualifies as replacement property in a 1031 exchange only if the co-ownership is treated as direct ownership of real property rather than as a partnership interest. Revenue Procedure 2002-22 lists fifteen conditions the IRS uses to evaluate that question, including a ceiling of 35 co-owners and unanimous consent for any sale or lease. It is a ruling-request checklist, not a safe harbor.
Can you use a tenant in common interest in a 1031 exchange?
Yes, if the interest is genuine co-ownership of real property. Section 1031 defers gain on an exchange of real property held for productive use in a trade or business or for investment. Since the 2017 tax act, only real property qualifies, for exchanges completed after December 31, 2017.
The obstacle is section 1031(a)(2), which excludes partnership interests from like-kind treatment. A tenancy in common that operates like a partnership gets recharacterized, and the exchange fails. Everything in the analysis flows from keeping the co-ownership on the correct side of that line.
What is Revenue Procedure 2002-22, and why is it not a safe harbor?
Revenue Procedure 2002-22, 2002-1 C.B. 733, issued April 8, 2002, sets out the conditions under which the IRS will consider a ruling request that an undivided fractional interest is not an interest in a business entity.
Nearly every sponsor page describes it as a safe harbor. It is not, and section 3 of the revenue procedure says so directly: the guidelines are “not intended to be substantive rules and are not to be used for audit purposes.” Satisfying all fifteen conditions does not guarantee the result on audit, and failing one does not automatically lose it.
That distinction matters when you are told a deal is “2002-22 compliant” as though compliance were a certification. Plan against the conditions, but do not treat clearing them as protection you have purchased.
What conditions must a TIC satisfy under Revenue Procedure 2002-22?
The fifteen conditions appear at sections 6.01 through 6.15. These are the ones that actually kill deals.
| Condition | Requirement | Why deals fail it |
|---|---|---|
| 6.01 | Title held as tenancy in common under local law; no entity may hold title | Sponsor puts an LLC on title for lender convenience |
| 6.02 | No more than 35 co-owners (spouses count as one; a deceased co-owner’s heirs count as one) | Syndications outgrow the ceiling |
| 6.03 | No entity treatment: no partnership return, no common business name, no holding out as partners | Marketing materials describe co-owners as partners |
| 6.05 | Unanimous consent for any sale, lease or re-lease, hiring of a manager, negotiation of a management contract, or creating or modifying a blanket lien | One unreachable co-owner freezes the asset |
| 6.06 | Each co-owner keeps the right to transfer, partition, and encumber without approval | Agreement waives partition to hold the group together |
| 6.10 | Call options at fair market value permitted; put options to sponsor, lessee, co-owner, or lender prohibited | Sponsor offers a liquidity backstop |
| 6.11 | No business activities beyond customary maintenance, repair, and leasing | Co-owners run an operating business at the property |
| 6.12 | Management and brokerage agreements renewable no less than annually; fees at market and not based on income or profits; net revenues disbursed within 3 months | Long-term management contracts with profit participation |
Conditions 6.04, 6.07, 6.08, 6.09, 6.13, 6.14, and 6.15 cover the co-ownership agreement, sharing of sale proceeds and liabilities, proportionate profit and loss sharing, blanket lien debt, arm’s length leases, lender independence, and sponsor compensation at fair market value.
What decisions require unanimous consent, and why does it matter?
Section 6.05 requires unanimity for any sale of the property, any lease or re-lease, hiring a manager, negotiating a management contract, and creating or modifying a blanket lien. Everything else can go by majority.
This is the practical failure mode of TIC ownership, and it is the reason the Delaware Statutory Trust took over the market. With 35 co-owners, one person who is unreachable, litigious, in a divorce, or simply obstructive can block a sale in a rising market or a lease renewal that the property needs. There is no manager empowered to override them, because empowering one would itself suggest entity treatment.
In our experience advising owners on replacement property, this is the risk that gets least attention at closing and causes the most trouble in year three.
How does a TIC compare to a Delaware Statutory Trust?
Revenue Ruling 2004-86 treats a beneficial interest in a properly structured Delaware Statutory Trust as an undivided fractional interest in the underlying real property, so it qualifies as replacement property. The trade is control: the trustee holds management power, and beneficiaries hold none.
DST sponsors operate under significant restrictions drawn from the ruling’s facts, commonly summarized in the industry as prohibitions on new capital contributions, refinancing, reinvesting sale proceeds, capital improvements beyond normal repairs, renegotiating leases except on tenant insolvency, holding reserves in anything but short-term obligations, and retaining cash beyond quarterly distribution.
DST equity raised reached $8.41 billion in 2025, up roughly 49 percent from about $5.66 billion in 2024, according to Mountain Dell Consulting. Owners who want passive treatment increasingly take the DST. Owners who want a voice in the asset take the TIC and accept the unanimity problem. Our guide to the Delaware Statutory Trust 1031 exchange in California covers that structure in detail.
What are the 45-day and 180-day deadlines?
Replacement property must be identified within 45 days of transferring the relinquished property, and the exchange must be completed within 180 days, or by the due date of the return including extensions if that comes first. Neither deadline can be extended for a TIC deal that is still being papered.
TIC closings involve more moving parts than a single-owner purchase: co-ownership agreement, lender approval of a fractional borrower, and title vesting for every co-owner. Identification mechanics are covered in our guide to the 45-day identification rules in California, and the broader mechanics in our California 1031 exchange guide.
What is the California clawback on a 1031 exchange?
When you relinquish California property and acquire replacement property outside California, the state does not forfeit its claim on the deferred California-source gain. Revenue and Taxation Code sections 18032 and 24953 preserve California’s right to tax that portion when the gain is eventually recognized.
Owners moving equity from a California asset into Texas, Nevada, or Arizona regularly assume the California tax exposure ends at the state line. It does not.
Do you have to file FTB Form 3840 every year?
Yes, and this is the obligation owners forget. Form 3840 is required for the year of the exchange and every year afterward for as long as the deferred gain remains unrecognized.
The filing survives your move out of California. It follows the property through every subsequent exchange. If you have no other California filing requirement, you file the form on its own. Failure to file exposes you to a penalty and lets the Franchise Tax Board estimate and assess the deferred gain, which is usually how a clawback assessment begins.
Can one co-owner force a sale of California TIC property?
Yes. A cotenant’s right to partition under Code of Civil Procedure section 872.210 and following is absolute in California, absent a valid written waiver. Civil Code sections 682, 685, and 686 define the tenancy in common that gives rise to it.
The California Partition of Real Property Act, at Code of Civil Procedure sections 874.311 through 874.323, took effect January 1, 2023 under AB 2245. It applies to tenancy in common real property where the cotenants have not signed a written agreement governing partition. It requires a court-ordered appraisal of fair market value under section 874.316, gives the remaining cotenants a buyout right at the appraised value under section 874.317, and prefers an open market sale over a forced auction.
How do you reconcile the partition right with the Partition Act?
These two regimes pull against each other, and the agreement that solves one creates the other.
Section 6.06 of Revenue Procedure 2002-22 requires that each co-owner retain the right to transfer, partition, and encumber the interest without approval. A TIC agreement that waives partition to keep the group locked together drifts toward entity treatment. But since January 1, 2023, the Partition of Real Property Act applies by default to exactly those TICs with no written partition agreement. The structure cleanest for section 1031 purposes is the one most exposed to a court-ordered appraisal and forced buyout.
The drafting answer sits inside the revenue procedure itself. Sections 6.04 and 6.06 permit a co-ownership agreement containing a right of first offer, under which a co-owner agrees to offer the interest to the other co-owners, the sponsor, or the lessee at fair market value determined when the partition right is exercised, before proceeding with partition. That is a speed bump the IRS has contemplated, and it does not waive the right.
Getting this wrong has a compounding cost. A forced sale inside the holding period can unwind the replacement property, trigger the recognition event the exchange deferred, and start the section 18032 clawback and the end of the Form 3840 chain in the same year.
How large is the 1031 market?
Section 1031 exchanges support roughly $100 billion in annual United States transaction volume, according to the Federation of Exchange Accommodators.
An Ernst & Young macroeconomic study using 2021 data attributed 976,000 jobs, $48.6 billion of labor income, and $97.4 billion of value added to United States GDP to section 1031 activity, along with $7.8 billion in federal, state, and local tax revenue. The National Association of Realtors has reported that about 40 percent of commercial real estate transactions would not occur without section 1031.
For owners, the useful numbers are the hard ones: 35 co-owners maximum, 45 days to identify, 180 days to close, management agreements renewable annually, and net revenues disbursed within 3 months.
Frequently asked questions about TIC 1031 exchanges in California
Can you do a 1031 exchange with a tenant in common interest?
Yes, if the interest is genuine co-ownership of real property rather than a disguised partnership interest. Section 1031(a)(2) excludes partnership interests, and Revenue Procedure 2002-22 sets out the fifteen conditions the IRS applies to that question.
How many owners can a TIC have for a 1031 exchange?
No more than 35 under section 6.02 of Revenue Procedure 2002-22. A husband and wife count as a single co-owner, and the heirs of a deceased co-owner count as one.
What is the difference between a TIC and a DST?
A TIC co-owner holds title and votes on major decisions, including a unanimity requirement for any sale. A DST beneficiary holds a beneficial interest with no management authority, and the trustee decides. DSTs avoid the co-owner deadlock problem and have taken most of the market.
Do I have to file Form 3840 every year in California?
Yes, for the year of the exchange and annually thereafter until the deferred gain is recognized. The obligation continues even after you stop being a California resident and carries through subsequent exchanges.
Can one co-owner force the sale of a TIC property in California?
Yes. Partition is an absolute right for a cotenant under Code of Civil Procedure section 872.210 unless validly waived in writing. Since January 1, 2023, sections 874.311 through 874.323 add a mandatory appraisal and a cotenant buyout right where no written partition agreement exists.
Is Revenue Procedure 2002-22 a safe harbor?
No. Section 3 of the revenue procedure states the guidelines are not substantive rules and are not to be used for audit purposes. They describe when the IRS will consider a ruling request.
What is the California clawback rule?
Revenue and Taxation Code sections 18032 and 24953 preserve California’s right to tax the California-source portion of deferred gain when a California property is exchanged for out-of-state replacement property and the gain is later recognized.
Speak with a California 1031 exchange attorney
The decisions that determine whether a TIC exchange holds up are made in the co-ownership agreement, before the 45-day clock matters. Title vesting, the voting provisions, the management contract term, and the partition language all need review against Revenue Procedure 2002-22 and against the Partition of Real Property Act, which most sponsor documents drafted before 2023 do not address.
Borna Houman Law advises property owners and real estate investors throughout Los Angeles County on exchange structure and co-ownership agreements. Call (888) 42-BORNA to schedule a confidential consultation. You can also review our real estate investment law practice.
Revenue Procedure 2002-22 is published by the Internal Revenue Service, and Form 3840 instructions are available from the California Franchise Tax Board.
This article is general information about California and federal law and is not legal or tax advice. Exchange structures turn on specific facts. Consult an attorney and a qualified tax adviser about your situation.
