Listen to our New Podcast on - 5 common questions pertaining to 1031 Tenant In Common (TIC) investments

5 common questions pertaining to 1031 Tenant In Common (TIC) investments:

I heard partnerships do not qualify as “like kind” property for a 1031 exchange. How does the purchase of a Tenant In Common (TIC) interest differ from a partnership?

The most profound reason is a 2002 IRS Revenue Procedure ruling. This ruling, Revenue Procedure 2002 dash 22, essentially set forth the guidelines whereby a TIC would be recognized as real estate, not as partnership. Hence, it could be used in a 1031 tax-deferred exchange. There was a small group of companies, mostly in southern California, offering TIC properties in the 1990’s as passive investment options for their clients. However, since the landmark ruling in 2002, TIC offerings have grown into a multi-billion dollar industry.

How is a Tenant In Common (TIC) property structured?

A Tenant In Common (TIC) investment represents co-ownership of real estate by two or more investors and is a form of holding title to real property. TICs permit up to 35 small to midsize investors to own an undivided fractional interest in a large, potentially institutional quality property/properties. TIC investors are on deed and considered a direct owner of the underlying real estate. TIC owners share “pro rata” in the potential income, tax benefits and capital appreciation of the property. Since the Internal Revenue Service issued guidance in 2002 (Rev. Proc. 2002 dash 22), TICs have become the preferred investment vehicle for real property investors who desire to defer capital gains taxes via a 1031 exchange and own property without the day to day management headaches.

Who is a Tenant In Common (TIC) “Sponsor” and what role do they play?

The TIC sponsor is a real estate firm who usually negotiates the purchase of the property, arranges the financing and distributes the potential income to the TIC investors. There are several key elements to consider before you choose which sponsor to turn your money over to for your 1031 exchange replacement property. The experience of the sponsor is extremely important. Typically, a sponsor with a solid track record and several years of experience can give an investor greater confidence than a new sponsor just now trying to tap into this growing, competitive market. An investor should also examine the experience of the key personnel of the company to determine how effective these individuals have been in acquiring, managing and eventually selling institutional quality properties in various real estate climates. For a sponsor to be most effective, they must demonstrate that they are committed to the longevity of the investors they serve.

Can I contact my realtor to purchase a Tenant In Common (TIC) investment?

Since 2002, when the IRS issued official guidance in Revenue Procedure 2002-22 on how Tenant In Common (TIC) investments would qualify for replacement property under Section 1031, the TIC industry has exploded into a multi-billion dollar a year business. However, since 2002, the vast majority of TIC investments have been sold through the securities industry by licensed securities representatives and broker-dealers, not through the traditional means of licensed real estate professionals. There is pending legislation with the National Association of Realtors and the SEC which would permit realtors to get involved.

Can I do a 1031 exchange into more than one Tenant In Common (TIC) property?

Yes. Depending on the equity amount and other factors of your individual exchange, you may have the ability to exchange into multiple TIC properties. This can potentially allow you diversify your investments by asset type and geographic location. For example if you sold a property for $1.5 million you could potentially acquire an apartment building in North Carolina, an office building in Texas and a shopping center in California.

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Tenants in Common Basics - Podcast

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Tenant In Common (TIC) Investment Properties

Welcome to the 1031 Alternatives Group podcast on Tenant In Common (TIC) Investment Properties

A Tenant In Common (TIC) investment represents co-ownership of real estate by two or more investors and is a form of holding title to real property. TICs permit small to mid-size investors the ability to own an undivided fractional interest in large, institutional- quality properties, such as office buildings, medical office, shopping centers and apartment complexes. TIC investors are on the deed and considered a direct owner of the underlying real estate. However, each Tenant In Common (TIC) investor or co-owner is not involved in the day-to-day management of the property. Each TIC investor enjoys his or her “pro rata” share of the net income, tax shelters, appreciation, and share of the proceeds at the property’s resale. Tenant In Common (TIC) properties are passive income vehicles that typically provide a monthly cash flow to investors. These are not partnerships and TIC investors have voting power on key decisions.

Even though a large amount of equity has been placed into Tenant In Common (TIC) investments to date, in various ways TICs have been an unknown investment option to many investors. Many of the earlier investors resided on the West Coast of the United States, but more and more investors across the country are becoming aware of the potential benefits TICs have to offer. The most powerful reason TICs have grown in popularity can be attributed to a 2002 Internal Revenue Service (IRS) Revenue Procedure ruling. This ruling (Rev. Proc. 2002-22), essentially set forth the guidelines whereby a TIC would be recognized as real estate, not as a partnership. Hence, it could be used in a 1031 tax-deferred exchange. TICs have become the preferred investment vehicle for real property investors who wish to defer capital gains and depreciation recapture taxes via a 1031 exchange and own real property without the management headaches.

Potential Benefits of Tenant in Common Investments:

Defer 100% of capital gains tax
Defer depreciation recapture tax
Relief from property management headaches
Upgrade to potentially institutional quality real estate
Potentially increase current income & capital appreciation
Diversify real estate investment holdings by asset class
Identify quality replacement property solutions during the stringent 45-day window
Geographically diversify real estate holdings
Non-recourse financing in place to meet 1031 leverage requirements
Cash flow from properties may be partially sheltered by new depreciation schedule.

Risks of Tenant in Common Investments:
As with any investment in real estate, there are risks associated with TIC ownership, including fluctuations in the real estate market that may impact the value of the property.

The following risks may also be associated with investment: illiquidity, economic risks due to vacancy rates, default if unable to pay mortgage and possible loss of principal.

TIC ownership requires unanimous approval to take major action, such as a re-finance or sale. Obtaining unanimity may be difficult when 10 or 20 investors are involved.
It is not possible to address all relevant risk factors in this forum. Risk factors are outlined in the Private Placement Memorandum for each offering. Investors should thoroughly understand all risk factors and discuss them with their financial representative prior to investing in a 1031/TIC offering.

With proper planning and by working with an experienced industry professional well versed in the niche field of 1031 exchange tenant in common investments an investor has the ability to develop a well-diversified, less-management intensive real estate portfolio, and is able accomplish these objectives all in a tax-deferred manner.

We thank you for tuning into the 1031 exchange podcast with the 1031 Alternatives Group on Tenant In Common (TIC) Investment Properties.