INDUSTRY UPDATE 1031 EXCHANGES
Using Tenancy-in-Common Interests
By Cecily A. Drucker, Esq.
Since the issuance of IRS Revenue Procedure 2002-22, the use of tenant-in-common interest as a vehicle for tax-deferred, 1031 exchange has grown in popularity. This procedure now makes it possible for co-owners of investment
TIC Investment to separately exchange their
tenant-in-common (TIC) interests investment properties.
In general, TIC co-owners of rental real estate cannot individually consummate an exchange since for tax purposes these co-owners are treated as partners and the partnership is the "taxpayer" that owns the rental real estate. Only when all the TIC owners sell their TIC interests collectively to one buyer will the owners qualify for a tax-deferred exchange. In Rev. Proc. 2002-22, however, the IRS has provided an opportunity for TIC co-owners of rental real estate who structure their co-ownership in accordance with the requirements of the Rev. Proc. to obtain an
IRS ruling that they are not a tax partnership.
If co-owners obtain such a ruling, each TIC owner will be able to both acquire and dispose of their respective TIC interests in rental real estate through a
tax-deferred 1031 exchange. There are basically 15 conditions that the Rev. Proc imposes as a prerequisite to obtaining a favorable ruling. Here are three of the most critical to TIC owners.
Owners must be tenants in common under the local law of the jurisdiction where the property is located.
Due to the fact that many lenders now require that a real estate borrower be a special-purpose entity (SPE), the ownership vehicle of choice for each separate TIC co-owner in a
TIC investment is a single-asset, single member limited liability company (SASMLLC).
