1031 Exchange tax

real estate investment




The Author

1031 Articles

Link to the March 2008 article in the CPA Journal, “Twenty Questions Answered in the Acquisition/Disposition of Business” (noting Q&A #4 and #6 addresses exchanges).


Article Regarding Structuring


Article Concerning Regulations

In connection with elder planning (as addressed in Q&A #20 of the cover story article in the May 2004 CPA Journal)

1031 Forms


Calculation Worksheet





Tenant in Common Interest - Revenue Procedure 2002-22

Legal Advisory

Vacation Homes

Contact us


Contact information

1031 exchanges


"The Good, Bad and Ugly" of Revenue Procedure 2002-22
By Peter A. Karl III
CPA - Attorney
(315) 735-6481

When a partial interest of realty is being reviewed for disposition or for use as replacement property in a IRC Section 1031 exchange, there are the following two categories of considerations:

"GOOD" category

"BAD and UGLY" category


1. Formation


Interest in tangible real property

Interest in intangible personal property

Undivided Fractional Interest (UFI)
Tenancy In Common (TIC) - ownership of a physically undivided portion of the entire realty parcel

Interest in a business entity (i.e. a partnership or LLC) which is the titleholder to the realty

TIC of Legal Title

TIC of Equitable Title (Note: This is a conservative interpretation of the Revenue Procedure)
1) Land contract
2) Financing lease

35 or less TIC co-owners

More than 35 TIC co-owners

IRC 761(a) election from the beginning

IRC 761(a) election by TIC co-owners whom had held their interests immediately prior through an entity which then distributes the realty ("drop and swap")

A sponsor may package TIC interests in return for the payment of reasonable compensation based on the FMV of the TIC interests.

A sponsor being compensated based on the income or profit of any TIC co-owner

The sponsor of the TIC interests or the lessee can be a TIC co-owner for up to six months

Any sponsor or lessee whom is a co-owner for more than six months

When the TIC co-owners - lessors wish to have a "kicker" in the FMV lease for the underlying realty, the rent can be based on a fixed percentage of gross receipts of a tenant

The kicker for the underlying realty is based on the net income, cash flow or shared equity of a tenant

TIC interest in a single property. However, multiple properties will be considered a "single property" if:
1) Multiple parcels are rented to one lessee reflected in one lease with blanket debt being on all of the realty; each co-owner must have an identical percentage of ownership on each of the parcels
2) Contiguous parcels
3) Noncontiguous parcels but related in use (e.g. office building and a nearby garage)

TIC interest in multiple properties not considered a single property such as an interest in a package of several unrelated properties.

2. Allocation Issues


Pro-rata sharing (in proportion to the co-owner's individual percentage in the underlying title)
1) Profits, expenses
2) Cash distributions
3) Indebtedness

Nonpro-rata sharing of: 

1) Profit, expenses
2) Cash distribution
3) Indebtedness

3. Management and Operations


TIC Co-ownership Agreement which must provide:


1) Unanimous and contemporaneous approval required for such "significant decisions" as:
  i) Sale, lease (including renewals), indebtedness/refinancing
  ii) Hiring of any manager
Majority vote OK for all other actions

a. Majority vote for significant decisions

Agreements for the managing of the realty

  1. Manager can be any co-owner or the sponsor but not a lessee
  2. Management fees must not be based on the amount of income or profit received by any TIC co-owner
  3. A common bank account is allowed (with periodic accounting statements for the co-owners being prepared) provided that any net revenues are distributed within three months of receipt
  4. The manager may negotiate on behalf of the co-owners subject to the subsequent approval of the co-owners pursuant to the unanimous/ majority voting rules
  5. Must be a renewable no less frequently than annually

Longer term management agreements for the realty (i.e. exceeding a year) or those with impermissible terms

Specific Power of Attorney (e.g. allowing a manager to execute a certain document)

Global Power of Attorney

Co-owners are able to perform services with respect to the realty that are normally undertaken in the maintenance and repair of rental property

Co-owners performing business activities with respect to the realty

"Intra property loan" in the event of a cash flow deficiency which shortfall is advanced by a co-owner or the manager (to another) are allowed if the debt is recourse and repaid within 31 days. This provision also precludes any co- owner, sponsor, manager or lessee being the lender with respect to the debt that encumbers the realty

"Intra property advances" without the "good" restrictions

4. Exit Strategies


The following restrictions can be recorded on title:
a. A Right of First Offer (ROFO) to other co-owners before the disposing co-owner sells to an outsider
b. A Right of First Refusal (ROFR) requiring the co-owner, before pursuing an action of partition, to offer the property to the other co-owners, sponsor, or lessee at the current FMV

Restrictions on the right to transfer, encumber, or partition a co-owner's interest (though a lender may restrict if commercially reasonable)

A co-owner may acquire a call option with respect to another co-owner's interest provided the price is based on valuing the property as a whole without any discounting for minority and/or control factors

A put option requiring the purchase of the co-owner's property interest by the sponsor another co-owner or the lessee

When the TIC realty is sold, all property debt is satisfied and the net proceeds are distributed

Real property sale with the purchaser assuming the mortgage sale proceeds by the group of co-owners

To Be Considered

  1. An entity such as a Solely Owned Limited Liability Company (SOLLC) as an owner of a TIC interest
  2. Master lease for multi-tenant property providing for a sublessor (such as the TIC sponsor) to pay a net lease amount to the co-owners in return for subleasing the property



©All Rights Reserved 2016

(315) 735-6481




Home | The Author | Structuring | Regulations | Calculation Worksheet | Questionnaire
Tenant in Common Interest - Revenue Procedure 2002-22
|Vacation Homes | Contact us | Site Directory