And since no separate taxable entity is created, if an owner sells a tenancy-in-common
undivided fractional interest in the property, the interest sold may qualify as eligible relinquished property under Sec.
Holding real estate as a partnership is more complicated and expensive than joint tenancy or tenancy-in-common
. Because a partnership is a separate legal entity, you'll have to draft a partnership agreement, file various documents with the state, and file annual partnership income tax returns.
The Internal Revenue Service, in its Revenue Procedure 2002-22, set forth the following guidelines on what constitutes an official tenancy-in-common
. To read the guidelines in full and for more specific information, visit: http://www.irs.gov/pub/irs-drop/rp-02-22.pdf.
The leading candidates for an FTB audit are those where the ownership is changed from a partnership to a tenancy-in-common
only a few minutes or hours before its disposition.
2002-22 offers guidelines for structuring tenancy-in-common ownership of relinquished property for the period before completion of the exchange.
2002-22, tenancy-in-common co-ownerships should not (1) file a partnership tax return, (2) conduct business under a common name, (3) hold themselves out or identify themselves as partners, by agreement or otherwise and (4) indicate to third parties that they are conducting their real estate activities as a partnership.
2002-22 requires each co-tenant to retain the right to approve the major decisions of the tenancy-in-common. Further, each co-tenant must have the right to approve the hiring of any manager and the sale, disposition or lease of the property, or creation of a lien.
Using disregarded entities to own a tenancy-in-common: Persons owning tenancy-in-common interests in the replacement or relinquished property may want to limit their personal liability exposure by owning such interests in a disregarded entity's name, such as a single-member LLC, rather than in their individual names.
Distributing tenancy-in-common interests: Another alternative is to have the partnership distribute a fractional tenancy-in-common portion of the relinquished property to the cash-out partners in redemption of their partnership interests.
The Revenue Procedure, viewed as a safe harbor, provides a relatively conservative set of standards that must be met to obtain a private letter ruling from the IRS that an arrangement qualifies as a tenancy-in-common