1031 Exchange Tenancy In Common Transactions (TIC’s)

1031 Exchanges can be extremely beneficial for investment property owners. They allow the owner to defer the payment of capital gains taxes and depreciation recapture taxes on the sale of real estate if they reinvest the sales proceeds into another like kind investment property. For a property owner, this means that they will have a larger down payment (sales proceeds without paying taxes) toward the purchase of their replacement investment property. This can translate into a bigger investment, a better return, and a larger profit.

1031 Exchanges, however, can be very laborious for the average investor. They must list their property for sale, wait for a willing buyer, negotiate the transaction and then wait for escrow to close. Once this is done they must identify a replacement property within the given amount of time, negotiate the purchase with the seller and then wait for the escrow to close. This time consuming task often ends in the exchanger settling for a sub-prime replacement property simply because they need to complete the transaction within the given amount of time (per the IRS 1031 exchange guidelines).

The stereotypical 1031 Exchange candidate is an empty nester that has owned and personally managed small rental property for multiple years. A decade or so ago they took some extra cash and made a very wise decision by investing in real estate.  Over the years they spent countless hours dealing with tenants, fixing leaky toilets and faucets, painting walls, prepping units and managing the finances all on their own. During these years, the fruits of their labor paid off by supplying some extra cash flow to their daily lives. Now, the property has appreciated in value to an unforeseen, unexpected amount. The property owners are fed up with dealing with the day to day hassles of property management and want to benefit from the property’ s amazing appreciation.

This turns them to the 1031 Exchange. By opting for the 1031 Exchange they forgo giving a piece of the cake, that they worked so hard to create, to Uncle Sam. These investors, however, are typically not living and dying by their rental property. They don’t necessarily need the equity because they also have a sizable income, 401k’s, IRA’s and other investments. What they want is to be able give up the day to day property management,  realize the fruits of their labors and investment, and not have to let Uncle Sam take his piece. What these investors want is their cake, and to eat it too.

Well, you know what? They deserve it. 1031 Exchange Tenants in Common transactions provide all of these things for investors that want just that. A Tenancy in Common 1031 Exchange allows a property owner to defer paying taxes to Uncle Sam, recognize the benefits of their property’s appreciation and cut out the day to day management headaches of small rental property.

What a 1031 Exchange tenants in common transaction does is allow an investor to purchase a fractional share of a large institutional grade, professionally managed real estate asset. An investor sells their rental property as a 1031 Exchange (while abiding by the IRS section 1031 guidelines, and by using a qualified intermediary) and becomes a tenant in common in a fractional ownership program. There are many companies out there that specialize in setting up these programs for investors. Financial planners, accommodators, tax professionals and qualified intermediaries can steer you in the right direction to find a company that sponsors 1031 Exchange Tenants in Common investment programs. What these companies do is acquire institutional grade commercial real estate (like a large apartment complex or an industrial building), package it up with a loan, insurance and professional property management, and then offer it to the general public as a Tenant in Common 1031 Exchange. There can be up to 35 different 1031 Exchange investors purchasing their own fractional share of ownership in the property. After the transaction closes, all the investors have to do is sit back and wait for their monthly checks to roll in.

The beauty of these investments is that it allows an investor to realize the gain from appreciation in their old property. For example, lets say that an investor purchased a property 30 years ago for $150,000. Today that property is worth $1,000,000. If the investor 1031 Exchanged this property they could purchase $1,000,000 worth of a large institutional grade commercial real estate asset. If this asset yielded an 8% annual cash return, the investor would receive $80,000 a year in income from the property, while also benefiting in their fractional appreciation of the new property and sharing in their fractional deduction of mortgage interest and depreciation.

1031 Exchange tenants in common transaction also eliminate the day to day management headaches that accompany small rental property. The professional property managers lease the space, make the repairs, pay the taxes, and more importantly distribute the cash flow to the investors. Institutional grade real estate also handles the real estate market fluctuations much better that small rental property. The returns are smoother over time due to their larger size (think of the monthly difference in cash flow in a 5 person property and a 500 person property. If 1 tenant vacates in the 5 person property you could be in the red. It would take a much more significant event in a larger property).

In all, the 1031 Exchange tenants in common transaction is a great deal for investors of this type. It enables them to defer paying taxes to Uncle Sam, recognize the benefits of all of their hard work, realize their property’s appreciation and cut out the day to day management headaches of small rental property.