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Does the stress of monthly rent collection
and after hour plumbing problems make you feel like a
performing seal at the circus? You're trying to keep a
spinning beach ball balanced on your nose, at the same time
that you're wildly clapping your flippers together hoping to
please an unappreciative audience. Does thinking about
selling your investment property make you feel like Bozo the
clown? Having to paint on a happy smiley face when thinking
about the large percentage of your profits that you're going
to lose to capital gains tax makes you frown?
There is a way to move on and leave the circus behind.
It's called a
1031/Tenant In Common (TIC) Exchange. This
kind of deferred capital gains tax investment is an
attractive option for owners of investment property who are
looking to get a return on their equity without having
nearly 30% of their profits swallowed by capital gains tax.
Under the regulations of the 1031/TIC Exchange program,
an investment property owner can "exchange" their current
commercial property for a "like-kind" investment property of
equal or greater value, deferring the payment of capital
gains taxes and maximizing their profits.
A relatively new tax program, the 1031/TIC Exchange
program wasn't sanctioned by the IRS until 2002. Many
commercial property owners who might qualify for the 1031
deferred tax program don't know that it's a viable option
available to them.
Qualified investment property owners will discover that
there are other benefits to the 1031/TIC Tax Deferred
Exchange program. You'll have a monthly income stream from
your investment property, without the hassles that go along
with being a hands-on landlord. And your new 1031/TIC
Exchange investment property will pass directly to your
heirs at the stepped up basis (according to current tax
law). Your beneficiaries won't have to pay capital gains
tax.
There are three very important elements of the 1031/TIC
deferred tax transaction that every investment property
owner should know:
* You'll need an unbiased third party qualified
intermediary, perhaps a lawyer or qualified CPA, who will
handle all of the paperwork and make sure the IRS guidelines
are followed.
* You'll need to work with a quality 1031 Sponsor Company
with a continuous inventory of grade A commercial real
estate.
* You'll need to make sure that your new commercial
investment is well maintained and serviced by a reliable
property management company with a great track record and
years of experience.
The 1031/TIC Exchange transaction can be a bit
complicated for the novice. Attempting it without the
guidance of a professional financial advisor, who
specializes in this kind of deferred capital gains tax
program, could lead to some unexpected and unsatisfactory
results.
You could find yourself involved with a 1031/TIC sponsor
company that handles poor quality real estate investments
that may need work have little appreciation potential. They
may have high tenant turn-over and require constant
maintenance. You'll need to make sure the 1031/TIC sponsor
company you're working with handles only quality real
estate. This is often high end office space leased to
long-term corporate clients.
You also want to avoid working with an unreliable
property management company. Poorly managed properties make
owners of 1031/TIC investment properties the targets of
lawsuits from unhappy tenants, and may lead to eventual loss
of equity as the building depreciates instead of increasing
in value.
You can't use a family attorney or CPA to generate the
paperwork necessary for the 1031/TIC exchange. You need to
find an unbiased third party who is experienced with this
capital gains tax deferment transaction. There are many
deadlines that must be adhered to when you're making this
kind of property exchange. If they are not met, you'll find
yourself paying those capital taxes out of your own pocket,
despite your good intentions.
There is a way for you to get out of the circus ring and
into the audience enjoying the performance.
For investment property owners who are interested in the
1031/TIC Exchange program, working with an experienced
financial advisor is the only way to avoid all of the
pitfalls of this complicated transaction.
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