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1031 Tenant in Common Exchanges: A "TIC" king Time Bomb at the Intersection of Real Estate Securities, and Tax Law?,

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Marilyn Cane, 1031 Tenant in Common Exchanges: A "TIC" king Time Bomb at the Intersection of Real Estate, Securities, and Tax Law?, 14 University of Miami Business Law Review 273 (2006). Those who follow economic trends know that investing in real estate has recently become a hotbed of activity. In response to the stock market's unpredictability, investors have been drawn to the commercial real estate market in record numbers, seeking to capitalize on low interest rates coupled with the rising appreciation such properties have offered. In addition to the potential upside of such investments, many commercial property investors seek a tax deferral method for the capital gains they realized upon the sale of other previously owned property. Section 1031 of the Internal Revenue Code ("Section 1031"), under specially defined circumstances, allows for deferral of the tax liability that would otherwise be imposed as a result of real property capital gains.3 For a variety of reasons which will be discussed, greater numbers of investors are choosing to take advantage of Section 1031's tax liability deferral by purchasing fractional interests in commercial real property through "1031 Tenant-in-Common ('TIC') exchanges." The 1031 TIC exchange is a relatively new investment vehicle that raises a number of novel legal issues. Primarily, whether such an arrangement should be considered a "security" under federal tax, federal securities, and state securities laws. The provisions of Section 1031 specifically exclude exchanges involving "stocks, bonds, or notes"6 as well as "other securities." Therefore, if a 1031 TIC exchange is deemed to be a security, it is questionable whether the arrangement would then meet the requirements of Section 1031 and entitle the investor to a tax deferral benefit. The Internal Revenue Service is "aware of the issue of whether, or under what circumstances, a TIC may constitute a security that may not be exchanged under Section 1031, and is watching how matters develop as the TIC concept evolves in the Section 1031 context. This article will explore the burgeoning 1031 TIC industry, discuss the nuances of 1031 TIC exchanges, and provide an analysis of whether such transactions are in fact, securities, and if so, whether that status poses a problem for the taxpayer seeking the advantages of Section 1031.

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University of Miami Business Law Journal

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