Requirements of a Tenant in Common Exchange

On March 19, 2002, the Internal Revenue Service issued Revenue Procedure 2002-22. This identified the requirements under which the Internal Revenue Service would consider a request for a ruling that an undivided fractional interest in real estate would be considered an interest in real estate and not an interest in a business entity.

This new revenue procedure allows individ­uals looking to complete an exchange the op­portunity to acquire a replacement property that is management-free and headache-free through tenants-In-common ownership. Individuals have the ability to own an undivided interest in a property that most people would not have the resources to own by themselves.

The following is an overview of the most significant statements in Revenue Procedure 2002-22.

1. Legal Title Held Direct—No Entities. Co-owners must hold legal title to the prop­erty as tenants-in-common under local law, directly or indirectly through a dis-regarded entity. Thus, “title to the property as a whole may not be held by an entity recognized under local law.”

2. Number of Co-Owners. The number of co-owners may not exceed 35 (a husband and wife may be treated as a single person).

3. No Entity-Like Activities. The co-ownership may not file a partnership or corporate tax return, may not conduct business under a common name, may not execute a partnership or limited liability company agreement and may not otherwise hold itself out as a partnership or other form of business entity.

4. Co-Ownership Agreements Allowed. Co-owners may enter into a limited co-owner­ship agreement.

5.Voting On Decisions. In the co-ownership agreement, major decisions such as sale, lease, financing and the appointment of managing agents must be approved unanimously. For most other actions, the vote of co-owners holding a majority of the undivided interests may carry the day.

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