Does my TIC have to comply with Rev. Proc. 2002-22 to qualify for a 1031 exchange?

The procedure is a map for ruling requests, not a statute you can fail

Section 1 of Rev. Proc. 2002-22 describes its own job: it 'specifies the conditions under which the Internal Revenue Service will consider a request for a ruling' that an undivided fractional interest in rental real property is not an interest in a business entity. Section 3 then limits it to co-ownership classified under local law as a tenancy in common and adds the sentence every TIC owner should know: the guidelines 'are not intended to be substantive rules and are not to be used for audit purposes.'

Compliance does not even guarantee a ruling. Section 4 says the IRS 'may decline to issue a ruling' whenever the facts warrant, and section 6 lets it consider a request that misses conditions if the facts 'clearly establish that such a ruling is appropriate.'

A co-ownership that never requested a ruling stands or falls on the classification rules below. The glossary entry on the procedure explains where it came from.

The test that decides is the entity classification regulation

Reg. section 301.7701-1(a)(1) makes separate-entity status a question of federal tax law, not state law. Paragraph (a)(2) draws the line: a joint venture or other contractual arrangement 'may create a separate entity for federal tax purposes if the participants carry on a trade, business, financial operation, or venture and divide the profits therefrom,' but 'mere co-ownership of property that is maintained, kept in repair, and rented or leased does not constitute a separate entity.' Section 761(a) defines a partnership in the same terms.

The procedure's background section shows the safe side. Rev. Rul. 75-374, as summarised there, found no partnership where two co-owners of an apartment building used an agent who collected rents, paid taxes and insurance, and supplied heat, air conditioning, trash removal, unattended parking and upkeep of public areas.

The consequence sits in Reg. section 1.1031(a)-3(a)(5). Co-ownership is on the list of intangible interests that are real property; an interest in a partnership is not, unless the partnership has a valid election under section 761(a), which section 1031(e) then treats as an interest in each partnership asset. Your exchange has to clear that partnership interest exclusion.

Which departures from the fifteen conditions move you toward partnership

The revenue procedure summarises Bergford v. Commissioner, where seventy-eight investors in co-owned computer equipment were held to be partners. The court weighed the limits on the co-owners' ability to sell, lease or encumber their interests, and the manager's effective participation in profits through a 10 percent remarketing fee and in losses through interest-free advances. The procedure adds the Tax Court's test from Bussing: a partnership exists where parties 'join together capital or services with the intent of conducting a business or enterprise and of sharing the profits and losses.'

Read against that, the conditions sort into two groups. Section 6.03 (no partnership return, no common name, no agreement calling anyone a partner or member), section 6.11 (only activities customary for maintaining and repairing rental property) and the fee rules in sections 6.12 and 6.15 (no fee tied to income or profits) track the regulation and the cases. A group that files a Form 1065, pays its sponsor a share of profits or runs hotel-style services has the facts that create a partnership, whatever its deed says.

The second group is ruling housekeeping. The 35-person cap in section 6.02, the majority vote for minor matters in section 6.05, the right of first offer in section 6.06 and the three-month disbursement rule in section 6.12 have no counterpart in the regulation. Missing one stops a ruling; it is not, alone, the conduct of a business.

A self-check you can run before anyone drafts a contract

Pull five documents and answer these questions with your CPA. The aim is to find facts an examiner would call business conduct, not to grade yourselves against fifteen conditions.

• Returns: has the group ever filed a Form 1065 or issued a Schedule K-1, or does each owner report its share of rents and expenses on its own return?
• Deed: is each owner, or its single-member LLC, on title as a tenant in common, or does an entity hold the whole parcel?
• Co-ownership agreement: what are the parties called, which decisions need unanimous approval, and can each owner transfer, partition and encumber its own share?
• Management agreement: how is the fee computed, how long is the term, and does the manager advance money to owners who cannot pay their share?
• Services: does anyone connected with the owners provide more than maintenance, repair, utilities, parking and common-area upkeep to the occupants?

If you are over the line, fix it before the sale, not on the Form 8824

A group that has filed partnership returns owns partnership interests for federal purposes, and section 6.03 says the IRS generally will not rule where the co-owners held the property through a partnership immediately before forming the co-ownership. The remedy is a distribution of undivided interests well before any sale, with the timing problems that drop-and-swap planning sets out, and the multi-owner options guide explains how the deed and the return are read together.

A group on the right side of the line still has the contract it signed. Unanimous approval for a sale under section 6.05 is a term of your agreement, not a tax requirement, and TIC group exchanges without unanimous consent covers a co-owner who will not sign. Each exchanging co-owner is its own taxpayer with its own replacement, and the DST versus TIC comparison explains why a trust needs no votes.