TaxpayerNewCo-OwnerDisregardedEntity #1DisregardedEntity #2RentalProperty100%100%100%(A)Legend100% ownershipCo-ownership agreements (A)

Joint Ownership vs. Partnership Explained

Taxpayer owns 100% of Disregarded Entity #1, which owns 100% of the Rental Property. A New Co-Owner owns 100% of Disregarded Entity #2. Because each entity is disregarded, the two owners are treated as holding the Rental Property directly as tenants in common.

The IRS in PLR 201622008 determined that the contemplated co-ownership of the Rental Property would not constitute ownership in a partnership. The IRS evaluated the Option Agreement, Co-Ownership Agreement, and Management Agreement and determined these agreements would not violate any of the requirements provided in Rev. Proc. 2002-22.

(A) — Agreements between DE#1 and DE#2

Disregarded Entity #1 and Disregarded Entity #2 contemplated the following agreements:

  1. Triple Net Lease Agreement — DE#1 leases its rental property to DE#2 under a triple net lease.
  2. Option Agreement — DE#1 and DE#2 enter into an agreement that permits DE#1 to put a part of its ownership in the Rental Property to DE#2, and DE#2 was provided an option to call a portion of the ownership in the Rental Property from DE#1.
  3. Co-Ownership Agreement — A Co-Ownership Agreement with terms consistent with Rev. Proc. 2002-22 was contemplated upon joint ownership of the Rental Property.
  4. Management Agreement — Should DE#1 and DE#2 become co-owners, a management agreement consistent with Rev. Proc. 2002-22 was contemplated.

Key Takeaways

Disregarded entities are look-through

Because DE#1 and DE#2 are disregarded, Taxpayer and the New Co-Owner are treated as owning the Rental Property directly as tenants in common.

Co-ownership is not automatically a partnership

Mere co-ownership of property, with the co-owners sharing expenses and income, does not by itself create a partnership for federal tax purposes.

Rev. Proc. 2002-22 is the roadmap

The Option, Co-Ownership, and Management Agreements were drafted to satisfy the tenancy-in-common conditions of Rev. Proc. 2002-22 so the arrangement stays outside partnership treatment.

Why it matters for § 1031

Keeping the arrangement a tenancy in common rather than a partnership preserves each co-owner’s ability to use the interest in a like-kind exchange under section 1031.

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