Tools and Investment

Section 1031 of the tax code is the obvious option for real estate investors who are selling one investment property and interested in purchasing more. Until now, shareholders in search of cash-flowing properties were forced into buying another actively managed property. It was a tough decision for those looking to escape the administrative headaches associated with typical leased property. Investors now have an option; enter Tenant in Common (TiC).

Real estate is an obvious venture for investors looking for new ways to buy fractional shares of big projects. Many baby boomers, who broke into stocks and mutual funds in earlier decades, are looking to diversify their retirement portfolio.  The solution is investment-grade real estate. The payoff includes steady income checks, no hassle property management and deferral of capital gains taxes through TiC.

A TiC investment, when combined with a 1031 exchange, allows the owner of appreciated investment property to exchange into a fractional ownership position of a potentially much larger property without the tax liability otherwise due upon the sale of the old property. Additionally, the investor can rid himself of the administrative duties associated with real estate management for a passive alternative.

Recently, the release of IRS Revenue Procedure 2002-22 (Rev. Proc. 2002-22), the IRS has provided investors with guidelines for the necessary structure of the transaction to qualify for 1031 tax-deferred treatment. The Rev. Proc. secures 15 requirements.  For example; TiC owners can not exceed 35 on one property; Sponsors of the TiC interest may own the property (or an interest therein) for only 6 months before 100% of the interests are sold; Any decision that has material or economic impact on the property to its owners must be unanimously approved by the owners; and any management agreements must be renewable annually and must provide for market rate compensation.

Now that the IRS's standpoint of the transaction is clear, many investors are giving the go ahead. In just two years, the TiC industry is expected to go from $756 million in equity raised in 2003, to a projected $2 billion in equity raised in 2004, an increase of 171%. There is a large profit window that attracts investors.   

TiC owners have the same rights as a single owner, though they just own a percentage interest in the property.  Properties are pre-packaged with financing and management already secured.  There are efficiencies in identification, acquisition, financing, closing and operations.  The cash flow is normally paid monthly, it is tax-sheltered via depreciation pass through and interest deductions.  Finally, it is a passive investment. 

The advantages of this investment are numerous, though as in any investment the shareholder must weight the disadvantages, as well.  TiC disadvantages include; TiC investments are only available for "Accredited Investors", they are non-liquid investments, demand is currently greater than available supply, high price tag for entry: normally $100,000 - $250,000, and the investments controlled by SEC - sold through a broker/dealer  

Speculation in a TiC property is not a risk-free endeavor. Many investors make the mistake of failing to conduct proper due diligence into a potential TiC investment. The investor must not only confirm the information provided to them in the Private Placement Memorandum (PPM), but also the suitability and aptness of the particular outlay within their portfolio. Oversight of that can lead to a pricey lesson down the road.