Quick Primer on Undivided Fractional Interests, a.k.a. Tenants in Common

IRS Revenue Procedure 2002-22 outlines the conditions under which the IRS will consider a request for a ruling that an undivided fractional interest in rental real property is not an interest in a business entity. This procedure supersedes previous guidance and provides clarity on the treatment of tenancy-in-common (TIC) interests for federal tax purposes.

Understanding tenants-in-common arrangements

According to the IRS, a TIC arrangement does not constitute a separate business entity if the co-owners’ activities are limited to maintaining, repairing, and renting or leasing the property. This means that mere co-ownership of property, without engaging in additional business activities, will not be classified as a partnership for tax purposes.

To maintain compliance, TIC arrangements must adhere to specific guidelines. For instance, each co-owner must hold title to the property as a tenant-in-common under local law. Additionally, the IRS will generally treat multiple parcels of property owned by co-owners as a single property if they are leased to a single tenant and secured by a single debt. This helps maintain the integrity of the TIC structure and avoid reclassification as a partnership.

Maintaining integrity in TIC structures

The IRS also emphasizes the importance of transparency and proper documentation. Requests for advance rulings must include detailed information about the co-ownership arrangement, including promotional documents, lending agreements, and a full description of the property. This gives the IRS the necessary information to make an informed ruling.

Leading practices for facilitating compliance with IRS guidelines include:

• Maintaining clear and separate ownership interests
• Avoiding joint business activities beyond property maintenance and leasing
• Providing comprehensive documentation when seeking advance rulings

Although Revenue Procedure 2002-22 does not provide a formal ruling or safe harbor, its primary purpose is to clarify the IRS’s position on TIC arrangements and offer a framework for investors to follow. This helps prevent a co-ownership being classified as a business entity. It serves as a general roadmap, guiding property owners on how to structure their TIC arrangements in compliance with IRS expectations.

By following these practices, TIC co-owners can reduce the risk of their arrangement being classified as a partnership, which would have different tax implications.

How CLA can help

For more information or assistance with the formation, compliance, and reporting of undivided fractional interests in rental real property, please contact us. Our experienced professionals are here to help you navigate the complexities of TIC arrangements and maintain compliance with IRS guidelines.