IRS [Sort of] Clarifies Tenancy
In Common Investments

                                                   By Mary Lou Schwab CPA

It’s a common scenario: a real estate investor engaged in a 1031 tax deferred exchange is looking for suitable replacement property & hears about a Tenancy in Common (TIC) property where the investor becomes a tenant in common owner in a commercial property. Rev. Proc. 2002-22, issued in March 2002 specifies the conditions which the IRS may consider the purchase of a TIC interest an investment in real estate: “The central characteristic of a tenancy in common … is that each owner is deemed to own individually a physically undivided part of the entire parcel of property. Each tenant in common is entitled to share with the other tenants … the associated rights to a proportionate share of rents or profits from the property, to transfer the interest and to demand a partition of the property.” The new Revenue Procedure guidelines include:

     1. Each co-owner must hold title to the property as a tenant in common under local law.
     2. The number of co-owners (tenants in common) must be limited to 35 persons; a husband & wife are counted as one owner.
     3. The co-ownership may not act as a business entity.
     4. Co-owners must retain the right to approve the hiring of managers, sale of property, or leases of the property.
     5. The co-owners may enter into limited co-ownership agreement that runs with the land. For example, it may provide that a co-ownership interest be offered for sale to the other co-owners before selling it to others.
     6. Each co-owner must have the rights to transfer, partition & encumber the co-owner’s undivided interest in their property without the approval of any other person.
     7. All revenues & costs must be shared in proportion to each co-owner’s undivided interest in the property.
     8. Co-Owners may enter into management or brokerage arrangements that are renewable annually.

Real estate investors wanting to complete a 1031 exchange by investing in a TIC now have guidance from the IRS. No doubt we will see future court decisions or revenue rulings that will provide additional requirements. From a tax perspective, this IRS Rev. Proc. is not a guarantee for real estate investors & program sponsors of the TIC property would be wise to request an IRS review of their proposed investment structure. Investors need to check with their tax advisor & may be able to invest in a TIC property.

©2004 Bankers Escrow Corp. Mary Lou Schwab CPA is Vice President of Bankers Escrow Corporation and oversees the 1031 Exchange Division. She has over 22 years experience in real estate taxation. For questions on 1031 exchanges call 303-986-4848 or 800-571-6595. Bankers Escrow Corporation provides qualified intermediary services for all types of exchanges including simple deferred, reverse, construction, leasehold interest and business property exchanges.