Real Estate Journal — Commercial Real Estate Law — August 26 - September 15, 2016 — 9A
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C ommercial R eal E state L aw By Douglas M. Hershman, Esq., Cooch and Taylor, P.A. Tenancy-In-Common Interests and Like-Kind Exchanges
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ment between the various owners of the property (since the investor involved in the exchange will only be a 10% owner, there will be other parties who will own the re- maining 90%, whether just one or several). Typically, when more than one party owns real estate, the various owners will want to have an agreement in place that sets out the rights and benefits of the various owners. An agreement that goes too far will be deemed to be a part- nership agreement and will
void the exchange. In sum- mary, the Ruling requires that each owner of a TIC interest must hold title as a tenant in common under lo- cal law and that there can be no more than 35 co-owners. The co-owners cannot file a partnership or corporate tax return, nor can they conduct business under a common name. The co-ownership agreement must not identify the co-owners as partners, shareholders or members of a business entity, nor can they hold themselves out as any
of these things. In regard to voting rights, the agreement must require unanimous ap- proval for hiring of any prop- erty manager, the sale of the property, any leases of all or a portion of the property and the creation of any blanket liens against the property, such as a mortgage lien. There can be no restrictions on the sale, other disposition or encumbrance of the TIC interest. Sharing of revenues from the property must be based on ownership percent- ages. Proceeds from a sale of
the property must be used to pay debt secured by the prop- erty before the net proceeds get distributed. There are various other “rules” that are contained in the Ruling and it would be wise to work with competent legal counsel in regards to structuring a TIC ownership relationship for investment property. But, it can be done and remains one of the few viable tax benefits fir real estate investors. Douglas M. Hershman, Esq. is director at Cooch And Taylor, PA. n
like-kind exchange under Section 1031 of the Internal Rev-
enue Code remains one of the last g r e a t t a x savings op- portunities for real es- tate inves- t o r s ( a n d b u s i n e s s owne r s as
Douglas Hershman
well). It enables an investor to defer the payment of in- come tax on the gain from a sale of investment real estate. This can be quite beneficial when the potential gain that results from the sale could leave the investor with a large tax bill. So, where an investor wants to liquidate out of one real estate invest- ment and into another, using a like-kind exchange can be a great tool. However, what if the investor is liquidating a smaller valued solely owned and managed property but does not want to continue his or her investment in a similar smaller valued solely owned and managed property? The investor might think about re-investing the funds from the like-kind exchange into a tenant-in-common interest in a larger property whose management is handled by another party, such as an exchange of a 100% inter- est in real estate valued at $100,000 into a 10% tenant- in-common (TIC) interest in qualified real estate valued at $1 million. But there are cer- tain complications that could arise in such an exchange if the TIC structure is deemed a partnership by the IRS. While real estate can be the subject of a like-kind exchange, a partnership interest cannot as it is deemed to be personal property. If the TIC structure gets reclassified as a partner- ship, the IRS will disallow the exchange for tax purposes and require the payment of all of those taxes the investor thought would be deferred (with penalties and interest). In May of this year, the IRS released Private Letter Rul- ing 201622008 (the “Ruling”) in order to provide guidance on when a TIC interest might be deemed a partnership interest. It mostly relates to the provisions of the agree-
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