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The Rationale of Revenue Procedure 2002-22

Section 1031 of the Internal Revenue Service Code is one of the most generous, widely available provisions of the code, carving out an exception to the general rule that all gain or loss from the sale or disposition of property must be recognized. However, to ensure the veracity of a proposed 1031 exchange, investors often want to ensure their transaction falls within the “safe harbor” provisions of the code.

One of the grey areas for quite some time was whether Tenancy in Common (TIC) ownership qualified for 1031 benefits. What caused this potential confusion? TICs are often likened to partnership interests, and partnership interests are specifically excluded from 1031 exchange eligibility. Despite repeated requests by attorneys and tax planners who were aware of the fine line between TIC and partnership interests, the IRS steadfastly refused to clarify its position.

Eventually, however, the IRS relented and issued Revenue Procedure 2002-22. This finally offered detailed guidelines…of a sort. The IRS was quick to explain that the list was not to be construed as substantive rules or requirements, but merely guidelines to assist taxpayers who request letter rulings on their individual transactions. The reality, however, is that anyone involved in 1031 exchanges now view the IRS guidelines as an informal “safe harbor” for structuring a TIC 1031 exchange.