What Is Tenancy-in-Common Real Estate Interests?
Tenancy-in-common real estate interests are undivided fractional interests in a single property held by up to 35 co-owners, each with a deed to their share, sold by sponsors as replacement property in section 1031 exchanges under Revenue Procedure 2002-22, which requires unanimous consent for sales, leases and loans. They preceded Delaware statutory trusts as the exchange product of choice, boomed in the mid-2000s, and faltered when unanimous-consent rules left co-owners unable to act in the 2008 downturn.
| Item | Detail |
|---|---|
| Structure | Up to 35 co-owners on the deed; a co-ownership agreement; a sponsor-affiliated manager under a contract |
| Rev. Proc. 2002-22 | Conditions for a ruling that the interest is real estate, not a partnership: unanimous votes on sale, lease and debt; limited sponsor activity |
| 1031 | Each co-owner's interest qualifies as like-kind property if the structure stays within the ruling conditions |
| Loans | Each co-owner is on the loan, often with carve-out personal liability; lenders prefer DSTs for this reason |
| Governance | Unanimous consent on major decisions, which froze many properties in 2008 to 2011 |
| Tax | Income and depreciation pass through as direct ownership; Publication 925 passive rules; Publication 527 for rental |
How Does Tenancy-in-Common Real Estate Interests Work?
A sponsor buys a property and sells deeded fractional interests to investors completing 1031 exchanges, with a co-ownership agreement that follows Revenue Procedure 2002-22's conditions so the arrangement is treated as co-ownership of real estate rather than a partnership (which would not qualify for exchange): each co-owner must approve any sale, lease or loan, the sponsor may manage under a renewable contract but not control, and co-owners may sell their interest subject to a right of first offer. Each co-owner signs the loan and receives their share of rent and depreciation. The unanimous-consent requirement is the structure's defining weakness: when a property needed a refinancing or a lease concession in 2009, one dissenting co-owner could block it, and lenders foreclosed on properties whose owners could not agree. Delaware statutory trusts, which put the decision in a trustee's hands, displaced tenancies in common for new offerings for that reason, though many tenancy-in-common properties remain and the structure is still used among small groups of related investors. The IRS's like-kind exchange page covers the exchange rules.
Worked example. Thirty co-owners hold a $20 million office building with a $12 million loan, about $266,667 of equity each. In 2009 the anchor tenant asks for a $500,000 concession to stay; 29 co-owners agree and one refuses. Under the co-ownership agreement's unanimous-consent rule, the concession fails, the tenant leaves, the loan goes into default, and the lender forecloses: all thirty lose their equity, and the 1031 gains they deferred become taxable on the foreclosure. A Delaware statutory trust would have let the trustee grant the concession, which is why sponsors stopped offering tenancies in common. The inputs are illustrative numbers, not market data.
What Does Tenancy-in-Common Real Estate Interests Cost?
Offering and acquisition costs of 8% to 15% of equity; management fees under the sponsor's contract; each co-owner's own legal and accounting costs, since each files as a direct owner; loan costs, including personal carve-out liability; and the cost of the governance, which can be the whole investment.
How Is Tenancy-in-Common Real Estate Interests Taxed?
A co-ownership interest structured within Revenue Procedure 2002-22 is treated as a direct interest in real estate: it qualifies as like-kind property under section 1031, and each co-owner reports their share of rent, expenses and depreciation on Schedule E under IRS Publication 527, with losses subject to the passive rules of Publication 925; an arrangement that drifts into partnership treatment (shared profits beyond rent, business activity) loses 1031 eligibility; foreclosure is a taxable disposition that can trigger the deferred gain with no cash.
What Are the Risks of Tenancy-in-Common Real Estate Interests?
- Governance paralysis: one co-owner can block a sale, lease or refinancing.
- Personal liability on the loan's carve-outs, which a DST investor does not bear.
- Single-property, single-sponsor concentration.
- Illiquidity: an interest can be sold only subject to the agreement, usually at a discount.
Common misconception. A tenancy-in-common interest is not the same as a Delaware statutory trust interest with a deed instead of a certificate. The deed comes with a loan signature, personal carve-out liability, and a vote that every other co-owner also holds; the structure's appeal was the 1031 deferral and its failure was governance, and the market moved to trusts because a trustee can act when 35 strangers cannot.
Where Does Tenancy-in-Common Real Estate Interests Fit?
Liquidity. Poor: sales subject to the co-ownership agreement's rights of first offer, at discounts, with no organized market.
Who uses it. Small groups of related or aligned investors who want deeded co-ownership for a 1031 exchange and can agree on decisions; for unrelated investors, a Delaware statutory trust serves the same purpose with workable governance.
Portfolio role. A 1031 replacement-property structure for aligned co-owners, held in the real-asset sleeve as a single-property concentration with personal loan exposure.