Structuring a Tenant-in-Common (TIC) Arrangement to Avoid IRS Partnership Treatment

Tenant-in-common (TIC) ownership structures are a common vehicle for commercial real estate investments, particularly where multiple investors pool funds to acquire a property. A properly structured TIC allows each investor to own a direct, undivided interest in the property rather than holding an interest in a partnership or entity. Critically, TIC interests can be the subject of a 1031 exchange whereas partnership or LLC membership interests cannot be.  The IRS carefully scrutinizes TIC arrangements, and if the structure is not respected, the IRS may recharacterize the TIC as a partnership—potentially undermining 1031 exchanges, tax reporting positions, and investor expectations.

The IRS issued Revenue Procedure 2002-22 to provide a safe harbor for TIC arrangements. While not mandatory, the guidelines offer a framework: structures that adhere closely to the Revenue Procedure’s conditions are far more likely to be respected as TICs rather than partnerships.  When creating a TIC structure, it is prudent to adhere to the framework set out in the Revenue Procedure so that TIC owners can have comfort that their structuring decision will be respected by the IRS.

Key Principles for TIC Structures

1. Separate and Undivided Interests

Each co-owner must hold title directly, with their percentage ownership clearly stated in the deed. TIC interests must be direct ownership in real property, not entity ownership interests.

2. No Entity-Level Operations

A TIC should not operate as if it were a partnership or LLC. Co-owners must avoid filing partnership tax returns, holding themselves out as a partnership, or conducting unrelated business operations.

3. Shared Expenses but Limited Activities

Owners can share costs for taxes, insurance, and routine expenses, but their activities should remain limited to property ownership. Services beyond customary property management suggest partnership treatment.

4. Management Agreements

The Revenue Procedure permits a one-year (renewable) management agreement with either a co-owner or third-party manager, but the scope must be limited to standard leasing and operations—not broad business discretion.

5. Financing Structure

Financing must generally be nonrecourse beyond each TIC owner’s proportionate share. Cross-collateralization or collective liability among co-owners undermines TIC characterization.

6. Transferability

While rights of first offer or refusal are permitted, TIC interests must otherwise be freely transferable. Broad restrictions on transferability risk reclassification.

Revenue Procedure 2002-22: The 15 Safe Harbor Conditions

For TIC structures to fall within the IRS safe harbor, the following conditions should generally be satisfied:

1. Maximum of 35 Co-Owners – No more than 35 persons may hold TIC interests. Each co-owner may be an individual or an entity.
2. Direct Ownership – Each co-owner must hold title to a direct, undivided fractional interest in the property (not through an entity).
3. No Partnership Treatment – Co-owners may not file partnership tax returns, conduct business under a joint name, or otherwise represent themselves as a partnership or other entity.
4. Proportionate Sharing of Profits and Liabilities – Income, deductions, and expenses must be shared in proportion to ownership interests. No special allocations.  Note that this prevents the inclusion of a promote structure.
5. Proportionate Sharing of Debt – If the property is financed, debt must be shared among co-owners in proportion to their ownership percentages.
6. Restrictions on Alienation – TIC interests must generally be freely transferable. Only customary rights of first refusal or restrictions required by lenders are permitted.
7. No New Business Activities – The TIC’s activities must be limited to property ownership and customary operations; no new or unrelated business ventures.
8. Management and Brokerage Agreements – Co-owners may appoint a manager or broker under a one-year (renewable) contract. The manager’s powers must be limited to customary property management and leasing.
9. Leasing Restrictions – A master lease of the entire property to a single co-owner (or related party) is not permitted. Each co-owner must retain its own right to lease its share or approve property-wide leases collectively.
10. Options – Co-owners may not grant each other options to purchase additional interests, except for narrowly tailored rights of first offer or refusal.
11. No Waiver of Partition Rights – Co-owners cannot waive their right to partition the property under applicable state law.
12. No Joint Borrowing Beyond Proportionate Share – Co-owners may not collectively guarantee financing beyond their individual ownership interests.
13. Insurance – The TIC must carry insurance (liability, casualty, etc.) in proportion to the property and ownership shares.
14. Voting Rights – Certain major decisions (e.g., sale, lease of substantially all property, hiring of manager) must require unanimous approval; routine operational decisions may be decided by majority vote.
15. No Compensation Other than Customary Fees – Co-owners may not receive fees for services other than customary management fees permitted under the management agreement.

Conclusion

IRS Revenue Procedure 2002-22 remains the definitive guidance for structuring TICs in a manner likely to be respected for tax purposes. While adherence to the safe harbor is not legally required, structuring your TIC arrangement around these principles significantly reduces the risk of IRS recharacterization as a partnership.

At Hollander Real Estate Law, we help owners, operators, and investors design TIC structures that balance business objectives with compliance under the IRS framework. Whether you are exploring a TIC as part of a 1031 exchange, structuring a real estate joint venture, or evaluating entity formation options, our team can provide the guidance you need to avoid costly surprises.

If you would like to discuss how a TIC structure might fit into your real estate investment strategy, contact Hollander Real Estate Law today.