First Page
587
Abstract
Tenancy-in-common (TIC) ownership has been around for centuries, but the commercial use of TIC ownership of real property has accelerated over the last couple of decades. The impetus for TIC ownership of real property is twofold: (1) a desire property owners have to obtain the tax benefits of section 1031 of the Internal Revenue Code and (2) the desire property owners have to own property with other property owners and other professional managers and developers. Because section 1031 only applies to exchanges of real property, interests in partnerships and LLCs—the most common type of real property ownership—do not qualify for section 1031 nonrecognition. Thus, property owners enter into TIC arrangements, so transfers of their ownership interests will qualify for favorable section 1031 treatment. Such arrangements sound ideal, but there is a downside—for TIC arrangements to qualify as real property, for section 1031 purposes, the arrangement cannot include partnership attributes. Partnership attributes make co-ownership arrangements economically viable, so co-owners face the prospect of losing section 1031 treatment or foregoing co-ownership attributes that make the co-ownership arrangement palatable. A TICnership comes into existence when the co-owners of real property papered as a TIC arrangement enter into agreements that cause the arrangement to take on partnership attributes and become a partnership for tax purposes. Because section 1031 drives most TIC arrangements and because the co-owners would typically otherwise prefer to own property through a more economically palatable partnership or limited liability company, the number of TIC arrangements appears to be on the rise, and the number of TICnerships, as a percentage of total TIC arrangements, is also undoubtedly on the rise. This Article presents TICnerships as an increasing phenomenon in the real estate market. It describes how TICnerships come into existence, the law governing the classification of co-ownership arrangements as TICs or TICnerships for federal income tax purposes, and how federal income tax treats TICs and TICnerships differently. Most importantly, the Article shows how TICnerships can undermine the very tax treatment they are designed to provide and shows how property owners and their advisors can order affairs to preserve the desired section 1031 treatment and obtain the sought-after economic benefits of owning real property in a partnership or limited liability company.
Recommended Citation
Bradley T. Borden,
TICnerships,
18 Brook. J. Corp. Fin. & Com. L.
587
(2024).
Available at:
https://brooklynworks.brooklaw.edu/bjcfcl/vol18/iss2/5