Getting Out of a Tenancy in Common When Your Co Owners Will Not Sell

Tenancy in common interests were a popular 1031 replacement for years, particularly before Delaware Statutory Trusts became common. Investors pooled capital and each received a deeded, undivided interest in a larger property. Many of those investors are now asking the same question: how do I get out?

The answer depends heavily on the TIC agreement you signed and on your co owners. Unlike a DST, where a trustee controls the sale, a TIC is run by its owners, and owners do not always agree.

Why can leaving a TIC be difficult?

Because major decisions often require agreement from all co owners. IRS guidance for TIC arrangements used as replacement property contemplated unanimous approval for key decisions such as selling the property, refinancing, or approving major leases, and allowed a maximum of 35 co owners.

Unanimity protects each owner from being outvoted, but it also means one owner can block a sale that everyone else wants. In a troubled property, disagreements over whether to sell, refinance or invest more capital can freeze decisions for years.

Can you sell your TIC interest on its own?

Usually, yes, subject to the agreement. A TIC interest is a direct interest in real property, so it can be sold like other real estate. Many TIC agreements grant co owners a right of first refusal or require notice before a sale to an outsider.

The practical challenge is finding a buyer. There is no organised market for fractional interests in a specific building, buyers are often other investors or specialist firms, and prices can reflect a meaningful discount for lack of control and marketability.

Can a TIC interest be exchanged?

Yes. Because it is an interest in real property, a TIC interest can be the relinquished property in a 1031 exchange, and the proceeds can be exchanged into other like kind property. That is a key difference from partnership interests, which cannot be exchanged.

If the whole property is sold, each co owner is a separate taxpayer and can decide individually whether to exchange or take cash. That flexibility is one of the main reasons TIC structures were used.

What if co owners are deadlocked?

Options include:

• ›Negotiated buyout. One or more co owners buy out those who want to leave, often at a negotiated discount.
• ›Buy sell provisions. Some TIC agreements include mechanisms that allow one owner to offer to buy or sell at a set price, forcing a resolution.
• ›Partition. Co owners of real property generally have a right to ask a court to divide the property or order its sale. Many TIC agreements restrict or waive partition rights, and a partition action is expensive, slow and adversarial. It is usually a last resort.
• ›Sponsor or manager intervention. Where a sponsor or asset manager is still involved, it may facilitate a sale or restructuring.

What happens when the property is struggling?

TIC properties with falling occupancy or maturing loans can face capital calls. Co owners may be asked to contribute more money to cover shortfalls or refinance. Owners who do not contribute can see their positions diluted or face default provisions, depending on the agreement.

Loan maturity is a common crisis point. If co owners cannot agree on refinancing terms or a sale before the loan matures, the lender may be able to foreclose. A foreclosure can produce taxable gain for co owners even without cash, because debt relief is treated as value received.

How does a TIC compare with a DST at exit?

In a DST, the trustee decides when to sell and investors have no vote. That lack of control is a limitation, but it avoids deadlock. In a TIC, owners have control and responsibility, which can be valuable in a healthy property and a burden in a struggling one.

Some investors exiting TICs choose DST interests as their next replacement specifically to avoid owner decision making. DST interests are securities available to accredited investors only and carry their own illiquidity and costs.

How is debt handled when you leave?

Each co owner in a TIC is usually allocated a share of the property's loan. When you sell or exchange your interest, that allocated debt is part of the value you are relieved of, and to defer fully you generally need to replace it in your next property, just as with any other exchange.

This matters more than it might seem. A TIC interest bought with 60 percent leverage has a large debt component. An investor who exits and buys an unleveraged replacement may face mortgage boot unless they add cash or choose a leveraged replacement. Get the loan payoff statement and your allocated share before you plan the next step.

What if a buyer offers a discount?

Offers for fractional interests often come at a discount to the proportional value of the building, reflecting the lack of control and the difficulty of resale. Accepting a discounted price can still be sensible if the alternative is years of deadlock or a looming capital call.

Compare the offer with realistic alternatives: the expected outcome if the whole property is sold later, the risk of foreclosure, and the cost of a partition action. Sometimes a modest discount now is the cheapest exit available.

What to do first

Find your TIC agreement and read the sections on transfer restrictions, rights of first refusal, voting, capital calls, buy sell provisions and partition. Check the loan maturity date and the property's current performance. Then speak with your co owners early, before a loan maturity or vacancy forces the issue.

If you plan to exchange your interest, involve a Qualified Intermediary before any sale closes, and confirm with your CPA how debt allocated to your interest affects the amount you must replace.

Nothing here is tax, legal or investment advice. TIC agreements vary widely. Confirm your options with your attorney and CPA before acting.