1031 Property Exchange / Tenant-In-Commo
Real estate is a core investment in many personal financial portfolios; providing opportunities for both income and capital appreciation potential. But some investors may be slow in selling properties because of their concerns over capital gains taxes.
While paying taxes is the law and a patriotic privilege, Uncle Sam only requires us to pay our fair share, and sometimes not right away. That's why, for real estate investors, its possible to defer capital gains taxes through real estate exchanges.
Known as a 1031 tax deferred property exchange, this legal way to defer capital gains taxes is available to many real estate owners who sell their investment, rental, business or vacation real estate, and reinvest the net proceeds in other like-kind real estate.
American Investment Group specializes in 1031 exchange properties. We work with the nation's leading 1031 exchange property sponsors, helping our clients select from a variety of high quality Tenant-In-Common (TIC) and Delaware Statutory Trust (DST) programs. We especially seek those programs that offer fractional real estate ownership of large, investment-grade income properties around the country.
We search for only the best of retail, office, shopping center and multi-family 1031 exchange property offerings. We do not offer proprietary investment products, but rather only those properties that survive our demanding, thorough due diligence process.
Are 1031 exchanges for you? Please review the information we have collected here on our Web site. If you feel 1031 exchanges might be right for you, contact us for a complimentary consultation. We are here to help.
TICs can provide a professional managed, institutionally funded "turn-key" real estate solution with many benefits to the individual investor such as:
- Achieve higher net cash flow with less liability (non-recourse debt)
- Creates access to a larger pool of higher-quality, institutional-grade investment properties
- Allows investors with limited funds to enjoy geographic diversification as well as property variety
- Enables investors to trade time and labor intensive properties for more passive forms of real estate ownership
- Triple-net lease structure provides stable returns
- Interest can be transferred the same as sole ownership property
- Eliminate management obligations
- Generate renewed tax deductions that permit greater tax savings
- Create the diversification typically achieved through REITs & mutual funds
- Benefit from the extensive due diligence performed
What is a Tenant-in-Common?
In March 2002, the Internal Revenue Service issued Revenue Procedure 2002-22. This revenue procedure essentially explains when the IRS will consider a transfer of property held as a tenancy-in-common to be an investment in real estate for purposes of Section 1031. The Tenant-In-Common (TIC) ruling, commonly referred to as fractional ownership or co-ownership, allows you to exchange your property into an undivided, fractional interest of a much larger, higher-valued, better-located property. You assume your pro rata share of the income, debt and tax benefits in a turn-key solution without the headaches of daily management. This structure solves the growing problem among 1031 Exchangers - shortage of like-kind properties - a requirement for favorable tax treatment.
The idea behind the growing Tenant-In-Common (TIC) industry is really quite simple - with a minimum investment, the average person can have a part ownership in an institutional-type property. Each co-owner receives an individual deed at closing for his or her undivided percentage interest in the entire property. Each co-owner has the same rights a single owner would enjoy.
The required investment amount will vary depending on the property. Typically, most TICs minimum investments are around $250,000, a few niche Sponsors cater to investors with as little as $50,000 while some cater to investors with as much as $500,000 or greater. In addition, the TIC investment holding period can vary from three to five years to upwards of twenty years for the dissolution of the interest and sale of the property. Each TIC investor will commonly receive a check monthly with cash flows ranging from 5% to 10% in the initial year, not including appreciation.
Investment Property Types
What is "like kind" real estate? "Like-kind" essentially means that you have to exchange direct ownership in real estate for direct ownership in real estate. As long as both the property to be sold and the property to be purchased are held for productive use in a trade or business, or for investment purposes, taxpayers are free to purchase whatever type of property they want. You cannot exchange real estate for a partnership interest or interest in a limited liability company or vice versa.
How a 1031 Exchange Works
A 1031 tax deferred property exchange is an exchange in which capital gains tax deferral is available to real estate owners who sell their investment, rental, business or vacation real estate, and reinvest the net proceeds in other real estate. The purpose of the 1031 Exchange is to allow sellers of like-kind property to buy replacement property of like-kind within a specific time period and defer taxes.
Careful adherence to the requirements of Section 1031 exchange properties is important in maintaining the tax-deferred status of the transaction. The IRS gives investors a maximum of 180 calendar days from the closing of the initial sale to complete the exchange. Within the first 45 days of this period a seller must file a list of possible replacement properties with a qualified intermediary; a firm certified to act as the closing agent for 1031 property exchanges. A seller may target up to three properties regardless of value or a group of properties with a combined value that does not exceed 200 percent of the value of the initial property sale. Should either deadline be missed, the IRS will bill you for capital gains. The funds in a trust account can be used as earnest money for designated property once all IRS requirements for a 1031 tax exchange transaction are met.