Fractional interests in property.

• Author: Fountain, Jackie

The high cost of real estate may make the prospect of investing in real property ownership seem impossible to many. However, it also encourages people to think creatively to surmount this obstacle. Examples of creative avenues to allowing otherwise prohibitive property investment include establishing a partnership, engaging in a joint venture with someone who has a surplus of capital, or becoming a tenant in common in a property purchase.

This item discusses a tenancy in common and what this type of ownership entails. It also addresses the effect on one owner when a co-owner sells a fractional interest in a tenancy in common and whether the sale of the fractional interest could qualify for like-kind exchange treatment.

A tenancy in common is a specific type of ownership of real property by two or more parties. It is similar to a joint venture; however, a joint venture usually is recognized as a business entity that has been established to accomplish a specific purpose. Additionally, in a joint tenancy, the joint owners have a right of survivorship, while tenants in common can bequeath their property to whomever they choose. A tenancy in common gives each owner a fractional interest in the whole property, meaning that each party's percentage of ownership is a fraction of the value of the property. Each fractional owner shares in the income, as well as the expenses, relative to the percentage of ownership--a cost-sharing arrangement.

With a tenancy in common, each owner has an undivided interest in the purchased property, which gives each tenant in common an equal right to use the property, even if the fractional or percentages of interests are not equal among the owners. An example of an undivided interest would be purchasing a one-tenth undivided interest in 100 acres. The owner has not purchased 10 acres but one-tenth of the entire 100 acres. This entitles the co-owner to use the entire 100 acres; however, it also entitles the other owners to use the same 100 acres. In other words, each owner co-owns the entire physical property rather than controlling a specific part of it.

One reason a tenancy in common is preferable for property held for investment or rental purposes is that this form of joint ownership generally does not create a separate business entity for federal tax purposes. Regs. Sec. 301.7701-1(a)(2) provides that co-ownership of property that is maintained, kept in repair, and rented or leased does not constitute a separate...