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Tenants In Common

Exchange Basics

Tenants In Common

Tenancy in Common arrangements involve the investment by multiple owners in business properties for a profit. This allows more than one investor to own an undivided fractional ownership of investment property. For Section 1031 purposes, each owner may independently purchase and/or sell an interest in the property as either replacement property or relinquished property without regard to the intent of the other owners. This option permits investors to invest with other investors forming a tax partnership and being subject to Chapter K of the tax code. Investors and advisors familiar with like-kind exchanges know that lack of consensus among the partners on the sale and reinvestment of sale proceeds is the primary obstacle to performing section 1031 exchanges with partnerships.

That being said, a tenancy in common arrangement needs to avoid characteristics that would cause it to be treated as a tax partnership.

  • How much leeway do investors have in designing their own customized tenant in common agreement?
  • What types of properties are suitable for tenancy in common arrangements?
    • Passive ownership of land or undeveloped real estate versus trade or business property with a higher level of management activity required.
    • May investors invest in a pool of properties versus a single property?
    • How many investors may legitimately invest in a single property?
    • Does it matter if the prior Section 1031 investment or subsequent Section 1031 investment is treated as a tax partnership? Commissioner v. Culbertson
    • Does it matter if one of the investors earns a profits interest for contributing services to the project? Luna v. Commissioner
    • How far can the very simple tax regulations on Co-Tenancies be stretched?
    • Can a tenancy in common carry on a trade, business, financial operation, or venture and divide the profits therefrom?
  • The tax consequences of moving into and out of tax partnerships.
  • The conditions under which the IRS will issue a private letter ruling that an investment qualifies as a tenancy in common. Revenue Procedure 2002-22.

 
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