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1031-REIT Exchange
A 1031-TIC-721 or REIT (Real Estate Investment Trust) Exchange is a viable option for those investors looking to defer their capital gains taxes, diversify into a large portfolio of professionally managed institutional grade real estate, and defer capital gains taxes.
Click on the below links, to learn more about:
REIT's Defined
Non-Traded REIT's Explained
1031-TIC-721 Exchange Explained
Traditional TIC vs. 1031-TIC-721 Exchange
Qualification of a REIT
Objectives of a REIT
Benefits of a REIT
Who Should Invest?
REIT Frequently Asked Questions
TIC Advisors is a 1031 exchange Company specializing in 1031 exchanges into tenants in common replacement properties. It is our commitment to empower accredited investors with valuable information to educate and assist them with making informed 1031 exchange investment decisions.
REIT Defined
REIT-(Real Estate Investment Trust) is a corporation or business trust that combines the capital of many stockholders to acquire properties. One of the most attractive aspects of REIT ownership is that corporations or trusts that qualify as a REIT generally do not pay federal corporate income tax to the IRS and are required to distribute 90% of its taxable income. This means that REIT income can be distributed to stockholders without double taxation at the corporate and stockholder levels.
Non-Traded REIT's Explained
Non-traded REIT's share price doesn't experience daily price changes since it's not traded on any exchange (NYSE, AMEX, NASDAQ). Based on these reported daily price changes, investors of these publicly traded shares may make rash decisions regarding their holdings. The results may be increased transaction costs and possibly greater tax obligations.
Some benefits of Non - Traded REIT's:
" Non-traded real estate investments as a necessary part of their portfolios is a proven investment strategy used by many institutional investors.
" Providing diversity to your investment portfolio
" Avoid volatility.
1031-TIC-721 Exchange Explained
In 1031 exchanges, real-estate owners defer capital-gains taxes on the sale of property by purchasing a replacement property of equal or greater value, according to rules set by the Internal Revenue Service. One variation is known as "Tenants in Common Programs," which allow sellers to complete a 1031 exchange by buying an undivided fractional interest in an institutional grade property. Each investor receives proportional fractional distributions of the income generated from the property.
A 721 exchange generally works like this: A contribution to a REIT may be structured as a tax-free transaction if the owner of real property contributes real property to a REIT known as an "UPREIT" or a "DOWNREIT". Individual investors 1031 exchange full or fractional ownership in a single property for partnership units in a large portfolio of investment-grade properties. However, when the taxpayer contributes the 1031 propertyto the REIT, the exchange may be disqualified because the replacement property must be held for investment or business purposes and not for resale to the REIT.
A creative solution to this problem may be for the taxpayer to be given the right to place the property in the UPREIT after one year as a "put" option. Alternatively, the UPREIT may be given the option to acquire the property after one year through a "call" option. Essential to this structure is that the taxpayer and the UPREIT have the right but not the obligation, via the "put" or "call" option contract, to complete the placement of the property into the UPREIT. Otherwise, the transaction may violate the rule that the property be held for investment or business purposes and not for immediate resale.
Traditional TIC vs. 1031-TIC-721 Exchange
Investors should consider the following difference of a 1031-TIC-721 Exchange verses a traditional 1031 exchange.
Lose Ability to Continue Exchanging: While investing in a REIT provides increased diversification relative to a traditional 1031 exchange or a 1031 exchange-TIC, investors give up the ability to keep exchanging. Investors can only convert the units into REIT shares, and taxes will be incurred in that transaction. This is attractive for some investors because it means less hassle in the future, but for other investors this limitation is unacceptable.
Increased Portfolio and Concentration Diversification: While TIC investors typically invest in a maximum of 3 properties per 1031 exchange, REIT's allow investors to participate in a large portfolio of geographically diverse properties.
Reduced Asset Class and Sponsor Diversification: While TIC investors have a comprehensive range of property types and companies to choose from, only a limited number of 1031-TIC-721 Exchange options are currently available.
Increased Estate Planning Flexibility: The ability to gift REIT shares in any amount provides an estate planning benefit that attracts many investors managing their estate.
Converting Long-Term Assets to Current Assets: Tenant in Common interests are considered long-term assets and cannot be easily converted to cash nor used as collateral to borrow against at a bank. Conversely, once a non-traded REIT gets listed and is publicly traded it then becomes a "Current Asset" on an owner's balance sheet and can be sold at anytime or margined against.
Qualification of a REIT
In order for a corporation to qualify as a REIT and gain the advantages of being a pass - through entity, free from taxation at the corporate level, it must comply with the following Internal Revenue Code provisions:
" Structured as Corporation, business trust, or similar association
" Managed by a board of directors or trustees
" Shares need to be fully transferable
" Minimum of 100 shareholders
" Pays dividends of at least 90 percent of REIT's taxable income
" No more than 50 percent of the shares can be held by five or fewer individuals during the last half of each taxable year
" At least 75 percent of total investment assets must be in real estate
" Derive at least 75 percent of gross income from rents or mortgage interest
" Have no more than 20 percent of its assets consist of stocks in taxable REIT subsidiaries
Objectives of a REIT
" To provide quarterly or monthly cash distributions to stock holders.
" To invest in a diversified portfolio of high quality real estate
" Preserve stockholders capital.
" Create an opportunity for investors who could not typically own large commercial real estate properties.
" Utilize a conservative investment philosophy and a moderate leverage strategy.
Benefits of a REIT
" REIT's allow smaller investors to own large, income producing commercial real estate
" REIT's pay quarterly or monthly dividends which are often used as an additional source of income for some investors
" The taxable income REIT's earn and pass through to REIT investors are at the top of the corporate food chain. Corporations are obligated to pay operating expenses such as rent, salaries, taxes, and utilities FIRST before paying interest payment to bondholders or dividends to stock holders. If a corporation hits a financial bump, the rent it pays to the REIT management company gets top priority.
" There are significant tax savings under current tax regulations when REIT's "pass through" property depreciation to investors.
" REIT's can diversify an investment portfolio, which offers the potential for reduced risk and higher returns
Who Should Invest?
" Investors who are not interested in completing future 1031 exchanges.
" Investors who have a long term "buy-and-hold" strategy.
" Investors seeking income.
" Investors seeking to diversify their portfolios and reduce volatility.
" Investors who want to own an interest in real estate and benefit from some tax-deferral.
REIT Frequently Asked Questions:
1. What is a Non-Traded Public REIT?
A Non-Traded Public REIT is a real estate investment trust that registers its company with the SEC, but does not list their shares on a national exchange such as the NYSE, NASDAQ, or AMEX. Non-Traded REITS are not as liquid as traded REITS, however most Non-Traded REIT's have limited share repurchase programs available after a minimum holding period.
2. What is a Traded Public REIT?
A traded REIT is a public entity that also is registered with the SEC and files all necessary documents AND have their shares trade on a national exchange such as the, NYSE, NASDAQ, or AMEX. The shares can be bought and sold daily, subject to volatility in the market place, with no specific suitability requirements.
3. Are the distributions guaranteed?
Distributions are not guaranteed. The company's income is derived from the rental of the properties to various tenants. The distributions are subject to the income that's available from funds from operations. As required by federal tax law, all REIT's must distribute 90% of their taxable income to qualify as a REIT and avoid double taxation.
4. Do I have any say in what properties are purchased?
Properties are purchased in accordance with the company by-laws and company charter at the discretion of the advisor. Investors' only role in this investment is to re-elect directors.
5. Who determines what types of properties are purchased?
The advisor of the trust determines what types of properties are purchased. It must however fall in line with what's stated in the company's prospectus. The company must follow the business plan they layout in the company charter.
6. What are the differences between Non-Traded REITs and Limited Partnerships?
" Non-Traded REITs have limited liquidity while limited partnerships offer liquidity only when the opportunity for liquidity exists i.e. sale of properties or refinance.
" Dividend reinvestment plans are available with Non-Traded REIT's while limited partnerships don't have that option.
" In a limited partnership no independent directors are required. Not so for Non-Traded REIT's.
" They are subject to NASAA (North American Securities Administrators Association) regulations which require a board consist of a majority of independent directors.
" Non Traded REIT's are bound by SEC regulations to make regular disclosures concerning their financials. A requirement not necessary with Limited Partnerships.
" Rather controlled by a general partner who can not be removed easily. REIT's have a min requirement of 100 shareholders while many REIT's have thousands. In a Limited Partnership there may be any number of general and limited partners.
" REIT's do not pass losses to investors while Limited Partnerships do.
" In a REIT investors receive a Form 1099 and Form K-1 in a limited partnership.
7. Is investing in Non-Traded REIT's for me?
Non-Traded REIT's may be an investment for you if;
" You are would like to avoid the volatility of the general stock market.
" You are seeking ways to diversify your investment portfolio.
" You are looking for preservation of capital and potential of principal appreciation
" You are looking for regular dividend income.
" You are looking for professional management of real property.
" You are not happy with traditional benchmark returns.
