New Rules Likely to Increase Use of Tenancy-in-Common Ownership in Like-Kind Exchanges

Journal of Taxation, Vol. 96, P. 303, May 2002

Posted: 27 Jun 2002


The new IRS Procedure generally tracks the practices already being used by the real estate industry that matches undivided interests in property with buyers in order to make nontaxable exchanges possible. To be sure, there are restrictions designed to prevent an arrangement from operating anything like a tax partnership, and there are other limitations that will require careful drafting of co-ownership agreements. Nevertheless, the overall impact of the guidance should be seen as quite favorable.

The practical effect of the "activity attribution rule" is that neither the sponsor nor the lessee (or a person related to either of them) can be a co-owner of the property for more than six months. Typically, before Rev. Proc. 2002-22 a sponsor would acquire a rental property and, over time, either the sponsor or its affiliate would sell off TIC interests in that property or act as a manager of the property. This rule effectively mandates that all interests be sold by the sponsor within six months so as to avoid "tainting" the customary activities conducted by the co-owners with the sales activity of the sponsor. Moreover, if the sale of all of the sponsor's interests does not occur within six months, it is possible that the IRS could argue that all of the TIC interests represented partnership interests from inception. For this reason, it is likely that this rule will effectively cause sponsors to covenant to sell all of their co-ownership interests in a property within six months in all events.

Suggested Citation

Lipton, Richard M., New Rules Likely to Increase Use of Tenancy-in-Common Ownership in Like-Kind Exchanges. Journal of Taxation, Vol. 96, P. 303, May 2002, Available at SSRN:

Richard M. Lipton (Contact Author)

Baker & McKenzie ( email )

One Prudential Plaza
130 East Randolph Drive
Chicago, IL 60601
United States

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