Preamble: There is little doubt that the Tenants-in-common industry is currently in a state of flux. During the “roaring 2000’s” TIC properties were flying off the shelf. Problem was that many of the properties were extremely overpriced, carried too much “sponsor baggage” and were leveraged to the hilt. The real estate investment class is doing some major adjustments (like the rest of the financial world) and there are still some very good opportunities available in fractional ownership. That being said….on to the article:
A 1031 exchange is usually executed as a three-way delayed exchange, referred to as a “Starker Exchange”, in which an intermediary is used to facilitate the transaction. Preferably, before you sell your property, you need to consider what type of replacement property will work best for you, and whether or not you want to own a whole or partial interest in a property. Increasingly, investors are choosing to purchase a partial Tenant-in-common interest for several reasons.
It is often difficult to locate a property that has the right purchase price, debt ratio, and closing schedule to meet the requirements for 1031 tax-deferred exchanges in the short 45-day time frame AND arrange any financing that may be necessary. A Tenant-in-common ownership interest has a number of advantages, such as:
- Flexible size to match your needs
- Pre-arranged financing
- No management hassles
- Potential for increased after-tax cash flow
- Economies of sale
- Can be identified and closed in a timely manner
- Investment can be diversified into more than one property, in more than one location
Although you are comfortable with real estate investments and have had good returns in the past, you may not like the daily headaches that can accompany real estate management. Are you ready to give up the hassles of dealing with tenants, maintaining facilities, paying property taxes, etc? Would you like to sell your property but are faced with onerous tax consequences on the sale? You’d rather enjoy the income from the property and let someone else manage it. With a TIC 1031 Exchange, you can do exactly that.
A TIC 1031 exchange allows you to exchange your management-intensive property for an institutional-quality property with the potential to generate steady income, tax benefits and appreciation. With a TIC 1031 exchange properties, you no longer have to feel burdened by your real estate. Through your management contract, a manager will be retained to manage the asset while you enjoy all the benefits of income property ownership and freedom from management duties.
Your income from the replacement property may be higher than what you were receiving from the original property. You can earn substantial cash flow that may be up to 60% sheltered by the depreciation of your new basis in your TIC purchase.
One of our favorite products in this area (fractional ownership for the rest of us) is offered by Rockwell Debt Free Properties in Salt Lake. Rockwell specializes in developing and offering up to exchangors single tenant, debt free properties that are leased by national credit tenants. These investments are extremely conservative and are providing very nice returns.
No capital gains taxes may be due until the replacement property is eventually sold. If you should pass while owning a property, your heirs will receive a stepped up basis and the capital gains tax will be completely avoided.