Revenue Procedure 2002-22

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Revenue Procedure 2002–22 (2002–14 I.R.B. 733) is Internal Revenue Service (IRS) guidance that sets out the conditions under which the IRS will consider a ruling that an undivided fractional (tenant-in-common) interest in rental real property is not an interest in a business entity for U.S. federal income tax purposes under Treasury Regulation §301.7701-2/-3. The procedure is most frequently discussed in connection with tenant-in-common (TIC) interests used in §1031 like-kind exchanges. It was published on April 8, 2002, in the Internal Revenue Bulletin.[1][2]

Background

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For tax classification, co-ownership of real estate turns on whether the arrangement rises to the level of a partnership or other “business entity.” Prior authorities recognized that mere co-ownership with customary rental-property activities is not a partnership, but broader joint ventures with centralized management or profit-sharing features can be.[1] Rev. Proc. 2002–22 superseded Rev. Proc. 2000-46, under which the Service would not issue rulings in this area, and modified Rev. Proc. 2002-3 by effectively removing TIC classification issues from the “no-rule” list and reopening the path to request IRS advance rulings.[1] For context, Treasury regulations state that “mere co-ownership of property that is maintained, kept in repair, and rented or leased” is not a separate entity for federal tax purposes; Rev. Proc. 2002–22 provides criteria the Service uses when considering advance rulings that a given co-ownership is within that principle.[3]

Scope

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The procedure applies to co-ownership of rental real property (other than mineral property) held as a tenancy in common under local law. It outlines information that must accompany a ruling request and states that the IRS will “ordinarily” not consider a request unless specified conditions are met.[2]

Conditions commonly cited

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Section 6 lists conditions the Service expects to see before it will generally consider a favorable ruling. Key conditions include:[2]

TIC ownership: Each co-owner must hold title (directly or via a disregarded entity) as a tenant-in-common; the property as a whole may not be titled in an entity.

Number of co-owners: Limited to 35 persons (with certain aggregation rules).

No entity treatment: The co-ownership may not file partnership/corporate returns or hold itself out as a business entity.

Voting: Unanimous approval is required for hiring a manager, sale or disposition, leasing, and creation or modification of a blanket lien; other actions may be by majority vote.

Restrictions on alienation: Each co-owner generally retains rights to transfer, partition, and encumber their interest, subject to commercially customary lender restrictions; rights of first offer are permitted.

Sharing of proceeds and liabilities on sale: Blanket debt must be satisfied and remaining proceeds distributed to co-owners.

Proportionate sharing: Revenues, expenses, and blanket debt must be shared in proportion to each co-owner’s undivided interest; short recourse advances (≤31 days) are permitted.

Options: Call options must reflect fair market value; put options to sponsors, lessees, co-owners, or lenders are not allowed.

No business activities beyond customary rental operations, measured with reference to unrelated-business income tax rental standards.

Management and brokerage agreements: Allowed (manager may be a sponsor or co-owner but not a lessee); must be renewable at least annually, pay fair-market fees not tied to income or profits, and distribute net revenues to owners within three months.

Leases and loans: Leases must be bona fide at fair-market rent (not profit-based), and lenders may not be related to the co-owners, sponsor, manager, or lessee.

The Service also states it may consider ruling requests that do not meet every condition if overall facts and circumstances warrant.[2]

Nature of the guidance

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Commentators generally describe Rev. Proc. 2002–22 as advance ruling criteria rather than a formal “safe harbor.”[4] In practice, however, the conditions have often functioned as benchmarks for structuring TIC offerings and co-ownership arrangements in §1031 exchanges.[5][6]

Application and subsequent developments

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After publication, taxpayers sought private letter rulings applying the procedure to specific TIC arrangements; for example, a 2016 ruling discusses compliance with the voting and management-agreement conditions. While private letter rulings are not precedent, they illustrate how the IRS analyzes the conditions in particular fact patterns.[7] More recently, the Service has continued to address TIC facts in private letter rulings, including PLR 202416012, which analyzed §1031 consequences where TIC interests arose from a trust context.[8] Private letter rulings are not precedent, but they illustrate how the Service applies Rev. Proc. 2002–22 to particular facts.[9]

Relation to Delaware statutory trusts

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In 2004, the Service issued Rev. Rul. 2004-86, concluding that, in specified circumstances, a Delaware statutory trust (DST) is treated as a trust (not a business entity) and that an interest in such a DST can qualify as real property for §1031 exchanges.[10] Following that ruling, many syndicated §1031 programs shifted from TIC structures (which are subject to the 35-owner limit and various unanimous-consent expectations in Rev. Proc. 2002–22) to DST structures, which avoid some of those operational constraints.[11]

Regulatory considerations

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Broker-dealer sales of syndicated TIC interests have been treated as securities offerings. In Notice to Members 05-18, the NASD (now FINRA) reminded members that TIC programs generally are investment contracts and that suitability, supervision, and disclosure rules apply when recommending them to customers.[12]

See also

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References

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  1. ^ a b c "Highlights of This Issue (includes Rev. Proc. 2002–22)" (PDF). Internal Revenue Bulletin. 2002 (14): 733–744. April 8, 2002. Retrieved October 9, 2025.
  2. ^ a b c d "Rev. Proc. 2002-22" (PDF). Internal Revenue Service. April 8, 2002. Retrieved October 9, 2025.
  3. ^ "26 C.F.R. § 301.7701-1(a)(2)". Legal Information Institute. Retrieved October 9, 2025.
  4. ^ "Understanding Rev. Proc. 2002-22 — Implications for TIC Structures". 1031 Exchange Place. Retrieved October 9, 2025.
  5. ^ "New Safe Harbor for Tenancies-in-Common". Willkie Farr & Gallagher LLP. May 2002. Retrieved October 9, 2025.
  6. ^ "Tax-Free Exchanges Using Tenant-in-Common Interests: The IRS Clarifies an Otherwise Murky Area". Robins Kaplan LLP. 2005. Retrieved October 9, 2025.
  7. ^ "PLR 201622008" (PDF). Internal Revenue Service. May 27, 2016. Retrieved October 9, 2025.
  8. ^ "PLR 202416012" (PDF). Internal Revenue Service. April 19, 2024. Retrieved October 9, 2025.
  9. ^ "Understanding IRS guidance — A brief primer". Internal Revenue Service. May 29, 2025. Retrieved October 9, 2025.
  10. ^ "Internal Revenue Bulletin 2004-33 (Rev. Rul. 2004-86)". Internal Revenue Service. Retrieved October 9, 2025.
  11. ^ "Rev. Rul. 2004-86 at Ten Years (The ABCs of DSTs Revisited)" (PDF). Baker McKenzie. 2020. Retrieved October 9, 2025.
  12. ^ "Notice to Members 05-18". FINRA. March 2, 2005. Retrieved October 9, 2025.
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