The Benefits of Tenant in Common 1031 Exchanges

In order to avoid costly capital gains taxes when selling real property, some investors opt for 1031 exchanges. However, the strict time limits and regulations imposed on 1031 …

In order to avoid costly capital gains taxes when selling real property, some investors opt for 1031 exchanges. However, the strict time limits and regulations imposed on 1031 exchanges can sometimes make it difficult to complete them as required, and some investors may be weary of managing their real estate investments. Investors dealing with 1031 exchanges may want to consider exchanging for shares in tenant in common (TIC) properties to smooth the process and ease the pressures of property management.

Many restrictions apply to 1031 exchanges, including that the property acquired must be of like kind to the property sold. Like kind refers to property of the same type; for example, exchanging U.S. real estate for U.S. real estate. (For more information on this, see our article Defer Taxes with 1031 Exchanges.)

Although there has been debate about whether the syndicated properties are real estate or securities, for the purposes of 1031 exchanges they are considered real estate, according to IRS Rev. Proc. 2002-22. Owners of a TIC property hold undivided interests, which means each owner—no matter how small a share he or she may have—is entitled full access to the property and cannot be denied this right by other owners. However, it is possible that the owners’ rights of access could eventually be restricted through the signing of a lease agreement.

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Each owner is also entitled to a share of the property’s profits proportionate to the size of his or her share of the property. Shares of the property can vary in size and be individually sold, mortgaged, foreclosed on or passed down to an heir.

The use of TIC 1031 exchanges also offers investors the opportunity to invest in institutional-grade real estate—i.e. large, high-quality property in recognized and desirable markets. By purchasing shares in TIC properties, more investors are able to afford these higher-quality properties than could if TIC was not an option.

Because the sizes and prices of TIC shares are variable, there is a wide selection of investment options to fit investors’ needs. Investors can also use these exchanges to diversify their holdings by purchasing shares in multiple TIC properties in different real estate classes rather than a single property.

Financing and due diligence packages are often available when dealing with TIC properties, which not only smoothes the exchange process but increases the likelihood of the deal closing as planned—something much-desired when dealing with time-sensitive 1031 exchanges.

But one of the primary reasons investors decide to move their money into TIC properties is because they are typically “hands off” investments. Usually, a professional property manager takes care of the day-to-day administration of the property, such as paying taxes and collecting rents. Investors who exchange a single title property for a TIC can be comfortable in the knowledge that the stresses of management are in the hands of a professional.

For investors interested in learning more about TIC properties, a web search for “tenant in common” should yield dozens of sites further detailing the concept and process. More information can also be found by searching the National Association of Realtors website.

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