--- title: What is Revenue Procedure 2002-22? description: In March of 2002, the IRS issued guidance for investors regarding undivided fractional interest when purchased as replacement properties in 1031 exchanges. image: https://www.realized1031.com/hubfs/Images/photo/abstract/deal-holding-house-IS-1130833057.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # What is Revenue Procedure 2002-22? Posted Jan 22, 2021 ![deal-holding-house-IS-1130833057](https://www.realized1031.com/hs-fs/hubfs/Images/photo/abstract/deal-holding-house-IS-1130833057.jpg?width=750&height=392&name=deal-holding-house-IS-1130833057.jpg) In March of 2002, the IRS issued guidance for investors regarding undivided fractional interest when purchased as replacement properties in 1031 exchanges. In the form of Revenue Procedure 2002-22, the advice superseded and repealed Revenue Procedure 2000-46. 2002-22 issued the guidelines under which taxpayers could seek an advance ruling for treating undivided interests as allowable assets under Section 1031. As a brief background, a [Section 1031 Exchange](https://www.realized1031.com/glossary/1031-exchange) refers to a method of deferring capital gains taxes on the sale of investment property by exchanging the proceeds from the sale of the property into the purchase of a like-kind investment property of equal or greater value. The IRS places stringent time limits on the identification and consummation of the replacement property transaction. The guidance in Rev Proc 2002-22 included the following: -  Each of the co-owners must hold title to the property, either directly or through a [disregarded entity.](https://www.realized1031.com/blog/rights-and-responsibilities-of-joint-ownership) - There is a maximum of 35 co-owners (a married couple or all persons who inherit an interest together are treated as a single co-owner for this purpose). - Co-owners may not act as a partnership. The activities of the co-owners together are limited to those customarily involved with the rental of property. - The major decisions of the co-owners must be unanimous. The list of significant decisions includes the sale, lease, or release of the property, negotiation of a blanket mortgage, hiring of a manager, and negotiating the management contract (which must be renewable annually). - Other decisions may be made by a vote of those holding more than 50% of the property's interests (if the co-owners agree to that structure). Subsequently, investors seeking to complete a 1031 exchange with a fractional interest purchase looked for tenant-in-common interests structured to comply with the guidelines. In 2016 the IRS issued further information in [Private Letter Ruling 201622008](https://www.irs.gov/pub/irs-wd/201622008.pdf), which ruled that the TIC agreements of the parties did not create a partnership between the co-owners. The PLR gave the first published guidance from the IRS on how to structure a TIC arrangement so that the investors can meet the requirements of Revenue Procedure 2002-22 and qualify for completion of a Section 1031 exchange using the purchase as the replacement property. The PLR emphasizes the importance of voting rights, management arrangements, and business between the co-owners and the agreements' timing. It might be of interest to the investor to note that the PLR specifically addressed the presence of a put and call option and ruled that the option's existence did not disqualify the transaction if the investor approached the timing cautiously. The option questioned (and approved) in the ruling was to sell a property the taxpayer already owned before the proposed transaction. A bit confusing, but a legitimate distinction. Remember that the advantage of a [TIC](https://www.realized1031.com/glossary/tenants-in-common-tic) investment for the smaller investor is the leverage of co-owners' funds. As an individual, you may not be able to buy a large or high-end property. But as one of twenty co-owners, you may be able to purchase an equal share of a superior property and enjoy the benefits of the investment while still meeting the requirements of your 1031 exchange goals.  This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. 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In the form of Revenue Procedure 2002-22, the advice superseded and repealed Revenue Procedure 2000-46. 2002-22 issued the guidelines under which taxpayers could seek an advance ruling for treating undivided interests as allowable assets under Section 1031. As a brief background, a Section 1031 Exchange refers to a method of deferring capital gains taxes on the sale of investment property by exchanging the proceeds from the sale of the property into the purchase of a like-kind investment property of equal or greater value. The IRS places stringent time limits on the identification and consummation of the replacement property transaction. The guidance in Rev Proc 2002-22 included the following: Each of the co-owners must hold title to the property, either directly or through a disregarded entity. There is a maximum of 35 co-owners (a married couple or all persons who inherit an interest together are treated as a single co-owner for this purpose). Co-owners may not act as a partnership. The activities of the co-owners together are limited to those customarily involved with the rental of property. The major decisions of the co-owners must be unanimous. The list of significant decisions includes the sale, lease, or release of the property, negotiation of a blanket mortgage, hiring of a manager, and negotiating the management contract (which must be renewable annually). Other decisions may be made by a vote of those holding more than 50% of the property's interests (if the co-owners agree to that structure). Subsequently, investors seeking to complete a 1031 exchange with a fractional interest purchase looked for tenant-in-common interests structured to comply with the guidelines. In 2016 the IRS issued further information in Private Letter Ruling 201622008, which ruled that the TIC agreements of the parties did not create a partnership between the co-owners. The PLR gave the first published guidance from the IRS on how to structure a TIC arrangement so that the investors can meet the requirements of Revenue Procedure 2002-22 and qualify for completion of a Section 1031 exchange using the purchase as the replacement property. The PLR emphasizes the importance of voting rights, management arrangements, and business between the co-owners and the agreements' timing. It might be of interest to the investor to note that the PLR specifically addressed the presence of a put and call option and ruled that the option's existence did not disqualify the transaction if the investor approached the timing cautiously. The option questioned (and approved) in the ruling was to sell a property the taxpayer already owned before the proposed transaction. A bit confusing, but a legitimate distinction. Remember that the advantage of a TIC investment for the smaller investor is the leverage of co-owners' funds. As an individual, you may not be able to buy a large or high-end property. But as one of twenty co-owners, you may be able to purchase an equal share of a superior property and enjoy the benefits of the investment while still meeting the requirements of your 1031 exchange goals. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.", "articleSection" : [ "1031 Exchange" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2021-01-22T17:03:37+0000", "datePublished" : "2021-01-22T17:03:36+0000", "description" : "In March of 2002, the IRS issued guidance for investors regarding undivided fractional interest when purchased as replacement properties in 1031 exchanges.", "headline" : "What is Revenue Procedure 2002-22?", "image" : { "@type" : "ImageObject", "height" : 501, "url" : "https://f.hubspotusercontent10.net/hubfs/733513/Images/photo/abstract/deal-holding-house-IS-1130833057.jpg", "width" : 750 }, "mainEntityOfPage" : "https://www.realized1031.com/blog/what-is-revenue-procedure-2002-22", "name" : "What is Revenue Procedure 2002-22?", "publisher" : { "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "USA", "addressLocality" : "Austin", "addressRegion" : "TX", "postalCode" : "78701", "streetAddress" : "500 W 13th Street " }, "logo" : { "@type" : "ImageObject", "height" : 60, "url" : "http://www.realized1031.com/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black-No-Margin-296x60-AMP.png", "width" : 296 }, "name" : "Realized" }, "thumbnailUrl" : "https://f.hubspotusercontent10.net/hubfs/733513/Images/photo/abstract/deal-holding-house-IS-1130833057.jpg" } ```