TIC Advisors

FAQ


What is a 1031 Exchange?
In a “1031 Exchange” the IRS allows a property owner to sell one property and (using 100% of the proceeds from the sale) buy another property without tax consequence; that is, paying no capital gains taxes on the transaction. (This transaction is authorized by “Section 1031” of the IRS code.) It’s one of the best possible strategies for deferring the capital gains tax that would ordinarily arise from the sale of real estate, as it can provide real estate owners with greater leverage, increased diversification, improved cash flow, increased potential for geographic relocation, and potential property consolidation.

What is “TENANTS-IN-COMMON”?
TENANTS-IN-COMMON real estate investing is ideal for investors who are tired of management responsibility but still want the high returns associated with property ownership.

In a TENANTS-IN-COMMON interest multiple owners come together to purchase a large, institutional-grade property, not as limited partners, but as individual owners. Each co-owner receives an individual deed at closing for his or her own undivided fractional interest in the entire property, and each has all the same rights as a single owner. (TENANTS-IN-COMMON investors in a given multi-tenant industrial complex, for instance, would share in the ownership of the entire property, not just one or more specific tenant spaces.) As a participant in a TENANTS-IN-COMMON interest you would own a piece of a large, professionally managed building, receive a pro rata share of all the revenue that building generates, benefit from additional tax shelters, very possibly enjoy increased cash flow, and preserve your capital by investing in property that continues to appreciate.

Best of all, investment in a TENANTS-IN-COMMON interest can help a real estate investor to defer capital gains taxes in accordance with 1031 Exchange requirements.

What are the Benefits to a TIC?

10 Benefits of Tenants in Common

1. You free yourself from day-to-day management responsibilities.

With no more property to manage, you have more leisure time to relax or pursue other interests. In addition, because someone else is managing the property for you, there are no geographical limitations. You are free to invest in real estate markets nationwide.

2. You can trust the professional people who are managing the property on your behalf.

Buildings owned by TENANTS-IN-COMMON interests are professionally managed by national real estate companies who have strong audited track records and extensive experience in all sectors, types, and locations of real estate. You can relax and trust them to maintain the buildings, do the leasing, collect rent, service the mortgage, and handle all of the other management responsibilities you would like to be free from.

3. You may very likely enjoy increased monthly cash flow.

Your investment in a TENANTS-IN-COMMON interest provides you with a check every month. The cash flow that owners typically receive generally starts at 6-7% per annum. Because exchangers take on a new depreciation schedule, however, cash distributions are typically 30- 60% tax sheltered, depending upon asset class and leverage.

4. You don’t have to do the legwork to find the building that you want to buy. highly qualified, national real estate company will locate the building for you, provide all due diligence, arrange for the financing, and do all the other work necessary to acquire the new investment property and set up the TENANTS-IN-COMMON program.

5. You are able to invest in larger, safer, higher-quality institutional properties than were you to invest as an individual.

You end up with a larger, higher-quality building that tends to attract tenants with greater financial strength and stability.

6. You benefit from multiple tax advantages.

You not only can defer capital gains taxes until death, at which point they are forgiven, you also can gain additional tax advantages through a new depreciation schedule and in doing so typically shelter 30-60% of your cash flow.

7. You gain non-recourse debt.

Accredited investors assume institutional grade, pre-arranged, non-recourse (no personal guarantee) financing. You can invest in properties that have no debt, or in ones with up to 75% leverage.

8. You can start with as little as $100,000.

TENANTS-IN-COMMON has a much lower minimum investment than does sole ownership and therefore is more flexible. Variable investment sizes can start as low as $100,000.

9. You have a first-class way to diversify your assets.

Large net proceeds may be split among several properties, and so invested in several different markets and asset classes.

10. You preserve your capital by investing in properties that continue to appreciate.

Profits can be locked in by selling out of highly appreciated markets and then re-investing 100% of the net proceeds from those sales into growth markets.

And bonus benefit #11:

11. You greatly simplify estate planning.

TENANTS-IN-COMMON can simplify wealth transfer and estate issues. After all, it’s much easier to divide a monthly check among heirs than it is to divide a building.

What are the requirements for full tax deferral?

To fully defer all capital gain taxes, an exchanger must meet four requirements:

1. The investor must reinvest all exchange proceeds. If an exchanger does not reinvest all exchange proceeds from the sale of the relinquished property, the balance received is considered "cash boot," and the investor will have to pay capital gains taxes on that amount.

2    The investor must acquire property with the same or greater debt. If an exchanger does not acquire a replacement property with an equal or greater amount of debt, he or she is relieved of a debt obligation, and this is called a "mortgage boot." The IRS considers this reduction in debt a benefit to the exchanger; therefore, it is taxable, unless it is offset by adding equivalent cash to the replacement property purchase.

3. The investor must use a “qualified intermediary” (also known as a “facilitator” or “accommodator”) to hold the funds from the first sale until purchase of the new property is closed. The “qualified intermediary” (QI) is the person or entity who acts as the middle person in the exchange, providing the paperwork, oversight, escrow services, and expertise necessary to ensure that the transaction legally qualifies as an Exchange under Section 1031 of the Internal Revenue Code. Even though a 1031 Exchange is a complicated process, an Exchange using a good QI can become a simple transaction and look surprisingly like a standard sale. TIC Advisors will help you to identify a QI suitable to your individual situation and work with him or her to make your 1031 Exchange go smoothly. (If you need help finding a QI, click here.)

4. The new investment must be in “like-kind” property – a term that is, fortunately, very flexible. It’s true that IRS 1031 Exchange rules technically require the exchange of "like-kind" relinquished property for other "like-kind" replacement property. This doesn’t mean, though, that exchanged properties must be of the exact same type (for example, that bare land is exchanged for bare land or an income property is exchanged for another income property). The actual definition of "like-kind" is far more empowering in its flexibility. In truth, any real property held for investment or real property used in a trade or business can be exchanged for any other real property held for investment or real property used in a trade or business.

How can a 1031 Exchange Advisor help you?

1. 1031 Exchange Advisor see to it that the whole “1031 Exchange” and “Tenants-In-Common” process is managed for you.

Both of the above processes require a good deal of paper work, and all of it must be done on a strict timeline according to IRS regulations. 1031 Exchange Advisor will work with real estate providers and qualified intermediaries to make sure that every part of the process gets done, gets done on time, and gets done according to your requirements and specifications.

2. 1031 Exchange Advisor will help you to choose which highly qualified, national real estate company (“Sponsor”).

Because a wide range of TENANTS-IN-COMMON properties exist for sale, in many different asset classes and geographical locations, it’s essential that you work with a knowledgeable national real estate Sponsor that can help you to easily identify possible properties within the requisite 45 days, acquire within 180 days, and even have a “back-up” in case your preferred purchase becomes unavailable for some reason.

3. 1031 Exchange Advisor help you with Asset Class Selection (determining which property type to buy).

What type of property would be best for you to buy under a TENANTS-IN-COMMON program? Shopping center? Office building? Apartment complex? Each property asset class has different performance and risk characteristics. A 1031 Exchange Advisor will advise you of the differences among property asset classes and assist you in determining which property asset class best fits your investment objectives.

4. 1031 Exchange Advisor help you with Property Analysis .

Each individual property must stand on its own merits and show evidence of strong investment value. A 1031 Exchange Advisor pores over each individual property's fundamentals and financial information to determine that property’s economic feasibility.

5. 1031 Exchange Advisor will help you with Program Analysis (determining which TENANTS-IN-COMMON program is best in your particular situation).

No two real estate Sponsor structures are identical, so A 1031 Exchange Advisor will make sure you understand the key structure differences among the programs you are considering and assist you in making the best choice for your particular situation.

6. 1031 Exchange Advisor provide all of these services at no cost to you.

These services are paid for by the national real estate companies who sell TENANTS-IN-COMMON interests, so there is no cost to you.

What is the role of the Tenant in Common Sponsor?

Tenant in Common Sponsors are the companies that package and market TIC syndicated properties. The duties of the TIC Exchange Sponsors include finding suitable property and successfully putting it under contract, performing the necessary due diligence, acquiring financing, entering into selling agreements with targeted broker/dealers, completing TIC interest sales, managing the property or arranging for property management services, sending monthly disbursements to TIC owners, sending annual summary statements to owners, and initiating or overseeing the property's sale and distribution of proceeds.

What is a Triple Net Lease?

The terms “Triple Net Lease” “Triple-Net,” “NNN,” “Net Lease,” “Net-Net-Net” are interchangeable. A Triple Net Lease requires the tenants to pay all insurance, maintenance, and taxes. The tenant(s) is (are) responsible for all normal expenses of ownership, leaving the owner free of day-to-day management responsibility.

Most commercial property Triple Net Leases are often between 15-25 years and include cost-of-living rent increases. Rental payment continues for the full term of a Triple Net Lease.

Types of Available Tenant in Common Properties

A wide range of TENANTS-IN-COMMON properties exist for sale, in many different asset classes and geographical locations and a 1031 Exchange Advisor can provide you access to the best Tenant in Common investment opportunities Nationwide.

  • Office Buildings (single and multi-tenant properties)
  • Multi-Family Housing (Class A & B)
  • Retail Spaces (single and multi-tenant properties)
  • Drug & Grocery Anchored Shopping Centers
  • Light Industrial, Warehouse, and Manufacturing Facilities
  • Restaurant (single tenant properties)
  • 1031 REIT (Real Estate Investment Trust)
  • Producing Oil and Gas

What is a qualified intermediary?

A qualified intermediary is an independent agent that facilitates an exchange. The taxpayer’s attorney or accountant cannot be a qualified intermediary. Most intermediaries are affiliated with banks, trust companies, or title companies. Using a qualified intermediary is one way of “safe harboring” an exchange. Essentially, the qualified intermediary takes an assignment of rights in the sale contract for the old property and the purchase contract for the new property. These are simple documents that the attorney fills out, along with a basic exchange agreement with the intermediary. Through these three documents, the intermediary is brought into the exchange and, subject to compliance with the timing rules discussed below, the transaction can qualify as an exchange rather than a taxable sale.