The short answer
Yes, if the group qualifies, but the election matters only if your co-ownership is a partnership for tax purposes. Section 761(a) lets an unincorporated organization used for investment only, and not for the active conduct of a business, elect with every member's agreement to be excluded from subchapter K, and section 1031(e) then treats an interest in it as an interest in each of its assets. A tenancy in common that merely rents and maintains its property is not a partnership to begin with, so it has nothing to elect out of. The election is a belt for groups near the line, not a cure for a group that runs a business, and a DST cannot make it.
At a glance
| Who may elect | An unincorporated organization availed of for investment purposes only, not the active conduct of a business |
|---|---|
| Three tests in Reg. section 1.761-2 | Own the property as co-owners; keep the right to take or dispose of your own share; no active business and no irrevocable agent |
| Everyone must agree | Section 761(a) requires the election of all the members |
| How it is made | A statement attached to a Form 1065 filed by the due date, with extensions, for the first year of exclusion |
| Deemed election | Facts showing the members intended exclusion from the first year, such as consistent separate reporting |
| Effect on section 1031 | Section 1031(e) treats the interest as an interest in each asset of the partnership |
| What it cannot do | A group that sells services or shares business profits does not qualify, and a DST cannot elect |
| Duration | Irrevocable while the organization qualifies, unless the Commissioner approves a revocation |
The election exists for groups that are partnerships but only invest
Section 761(a) defines a partnership to include any unincorporated group through which a business, financial operation or venture is carried on. It then lets the Treasury, 'at the election of all the members,' exclude an organization from subchapter K if the members' income can be determined without computing partnership taxable income and the organization is used for investment only, not for the active conduct of a business.
Reg. section 1.761-2(a)(2) turns that into three tests for an investing group. The participants must own the property as co-owners, must reserve the right separately to take or dispose of their shares, and must not actively conduct business or irrevocably authorize a representative to buy, sell or exchange the property. Each participant may delegate authority over its own share, but for no more than a year at a time.
The Form 1065 instructions state the practical result: a qualifying organization that elects 'won't be required to file Form 1065 except for the year of election.'
A true tenancy in common usually has nothing to elect out of
Reg. section 301.7701-1(a)(2) says that mere co-ownership of property that is maintained, kept in repair and rented does not create a separate entity. Such co-owners were never under subchapter K, and each already owns co-ownership interests that Reg. section 1.1031(a)-3 lists as real property. Whether your TIC must follow Rev. Proc. 2002-22 explains where that line falls.
That creates a tension the authorities do not reconcile. The election is made on a Form 1065, and section 6.03 of Rev. Proc. 2002-22 says a co-ownership seeking a ruling 'may not file a partnership or corporate tax return.' For a group that is plainly a co-ownership, filing adds a fact that was not there before; for a group that has drifted toward entity conduct, it may be the better of two risks.
Where the co-owners have never filed as an entity, report separately and provide only customary services, the usual answer is to leave the election alone; the group's CPA and counsel make the call.
How the election is made, and the deemed election that may already exist
Under Reg. section 1.761-2(b)(2)(i) the election is a statement attached to a properly executed Form 1065, filed by the return's due date including extensions for the first year exclusion is wanted. It gives the members' names, addresses and taxpayer identification numbers, states that the organization qualifies and that all members elect exclusion from all of subchapter K, and says where the agreement can be obtained.
Paragraph (b)(2)(ii) supplies a deemed election. An organization that never filed the statement is still treated as having elected if the facts show the members intended exclusion from the first year, and either of two facts may show it: an agreement at formation that the organization would be excluded, or members owning substantially all of the capital reporting their shares consistently with exclusion from the first year on.
Under paragraph (b)(3) the election takes effect unless, within 90 days after formation, a member tells the Commissioner it wants subchapter K to apply and confirms it notified the other members by registered or certified mail. It is then irrevocable while the organization qualifies, unless the Commissioner approves a revocation.
What the election does for an exchange, and what it does not
Section 1031(e) is the payoff: an interest in a partnership with a valid section 761(a) election 'shall be treated as an interest in each of the assets of such partnership and not as an interest in a partnership,' and Reg. section 1.1031(a)-3(a)(5) carves the same interest out of its partnership exclusion. Each member can then exchange its deemed share on its own, as co-owners taking separate DST interests after one sale describes.
The election does not change what the group does. A co-ownership whose sponsor shares in profits, whose manager runs services for occupants, or whose members pool capital to develop or sell property is conducting a business, and Reg. section 1.761-2(a) does not admit it. Past partnership returns also remain evidence of how the group operated.
Nor is it available on the other side of the exchange. Rev. Rul. 2004-86 says a Delaware statutory trust whose trustee gains business powers 'will not be able to elect to be excluded from the application of subchapter K,' because the beneficiaries do not own its assets as co-owners under state law. The seven deadly sins of a DST lists those powers.
Worked model: six co-owners, one net-leased building, and the question their CPA asks
Hypothetical, round numbers. Six investors bought a $4,800,000 net-leased warehouse in equal undivided shares. The deed names all six as tenants in common, the tenant handles repairs and taxes, a manager on a one-year contract collects rent for a fixed fee, and each owner has reported one sixth of the rent and depreciation on its own return since year one. The tenant now offers to buy, and two owners want to exchange.
On those facts the group is not a partnership, no election is needed, and each owner's $800,000 share is real property. Paragraph (b)(2)(ii) may already supply a deemed election anyway, since the owners have reported consistently with exclusion from the start. Filing a Form 1065 now would create the group's first partnership return.
Change one fact, a manager paid 20 percent of net operating income who also sells units to new investors, and the group has a profit-sharing agent and arguably a business. The election cannot help there; the repair is restructuring well before the sale, as drop-and-swap planning explains. Ask your CPA to test the real agreements against the regulation.
Related questions
If we elect out, do we still file a Form 1065 every year?
No. The Form 1065 instructions say an electing organization is not required to file the return except for the year of election. Each member then reports its own share of income and deductions directly.
Can one co-owner refuse the election?
Yes. Section 761(a) requires the election of all the members, and Reg. section 1.761-2(b)(3) lets any member defeat it by notifying the Commissioner within 90 days of formation that it wants subchapter K to apply.
Does the election fix a TIC that has been filing partnership returns for years?
Only prospectively, and only if the group qualifies as an investing organization. The election cannot be made for an organization that conducts a business, and the earlier returns remain evidence; a restructuring before the sale is usually the real remedy.
Can our DST elect out of subchapter K if the trustee ends up with extra powers?
No. Rev. Rul. 2004-86 states that the trust could not elect because its assets are not owned by the beneficiaries as co-owners under state law. A trust that gains those powers is classified as a partnership, and its interests fall outside section 1031.
Is a section 761 election the same as a drop and swap?
No. A drop and swap distributes undivided interests out of a partnership so the members hold real property directly. The election leaves the arrangement in place and treats each member as owning its share of the assets for the purposes the election covers.
Sources
Checked against these publications on October 8, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- 26 U.S. Code section 761, terms defined (partnership; election out of subchapter K)
- Reg. section 1.761-2, exclusion of certain unincorporated organizations from subchapter K
- 26 U.S. Code section 1031, including subsection (e) on electing partnerships
- Reg. section 1.1031(a)-3, definition of real property
- IRS, Instructions for Form 1065, who must file
- Reg. section 301.7701-1, classification of organizations for federal tax purposes
- IRS, Rev. Proc. 2002-22, undivided fractional interests in rental real property
- IRS, Rev. Rul. 2004-86, Delaware statutory trust interests