Tenant In Common

A Tenant In Common or more commonly referred to as simply TICs, which serve as a way of sharing ownership of real estate or property amongst more than one individual. It may be established through deed, will, title, or through other documents, when the ownership of a single property is bestowed upon more than one person sans specifying the size of interest. In other words, in TICs, each individual holds an undivided but fractional interest in the property.

In most 1031 Exchange transactions, property swappers often look to move into a Tenant In Common do to the many significant advantages to landowners. For example, TIC structures permits people who wish to diversify, to invest in various types of investment properties, larger chunks of real estate, and in different geographical markets. Also, a TIC tag helps to avail fixed-rate, non-recourse financing in institutional terms, which otherwise might not be possible for small scale single investors. Further, TIC's do not prevent a person from acquiring his/her own investment real estate in a subsequent 1031 tax deferred exchange. In other words, going back to sole ownership is still an option.

Also worth mentioning, TIC owners rarely have the responsibility of property maintenance or involvement in the day to day operation of the investment. Typically TIC's are large commercial properties where the shareholders have no responsibility to maintain it. This results in many investors who learn of the opportunity in TIC's to inquire further.

Even though TIC ownership is a combined ownership, TIC ownership can still be purchased, sold, inherited, bequeathed by will, and is subjected to property tax, gift tax, inheritance tax, and estate tax, in the same way as any other single owner property is treated. Upon the expiry of the tenant, the person’s interest in the property passes to his/her heirs through a will or relevant real estate documents, and does not get divided amongst other TIC owners. That is, there is no survivorship in Tenant In Common as in the case of joint tenancy ownership.

Regarding rights in a Tenant In Common, each tenant has unrestricted and equal rights to access the property subject. Further, each TIC can petition for and subsequently secure the partition of the property at any time sans any restriction. On partition, the petitioner gets sole right of ownership of the partitioned real estate that the court views as his/her rightful share in the prior undivided interest. In some cases, the court may order the property be sold, and the resulting money be shared amongst all Tenants In Common in the same proportion as their ownership interests were. But it is a last resort when all other steps to divide the property fail.

Finally, even though in a Tenant In Common, a tenant has to bear only a part of the total investments made, and can reap all the tax benefits throughout the ownership, the financial success in buying a property using the TIC option ultimately rests with the asset and its management. At present, TIC investment is on the upward spiral, and is definitely a potential real estate investment option. But, a lot, as mentioned above, depends on how one handles it post buy out.

What is a 1031 Exchange?

A 1031 Exchange, as governed by IRC, comes as a big boon for property investors. It lets real estate owners and property business owners swap like-kind real estate property in the open market, and by following certain IRC guidelines, could save paying capital gain tax on the sale. Even though the 1031 exchange is gaining popularity among real estate owners in the US, still many property owners end up paying taxes owing to ignorance. This article attempts to clear some of the vague areas that exist in the public understanding of the concept.

In a 1031 exchange, there are certain conditions that one needs to stick to while selling or buying the property. For example, according to IRC guidelines, there must be an exchange of two pieces of like-kind real estates. In other words, a person selling a real estate property under the 1031 exchange must buy another within the stipulated time in order to claim the benefits under the IRC section 1031. He/she can’t just sell his/her property, take the money from the buyer, and sit idle. It has to be invested elsewhere.

The IRS has given two time deadlines to the investors; the first one states that the sellers, within 45 days of closing the sale of the old property, must identify a new property to purchase. The exchanging parties can shortlist a minimum of three prospective replacement properties. The second deadline mandates that within 180 days of closing the sale of old property, the investor must have bought the exchange property as well. Meeting these two deadlines makes one’s property exchange a valid one under 1031.

The second condition under 1031 exchange that every property exchanger must adhere to is that the two real estates exchanged must be of a like-kind. Not to misinterpret the term, ‘like-mind’ under section 1031 refers to the usage of the properties, and not their grade or quality or modifications effected to its structure at any point in time. Therefore, it is obvious that any property that has been used for trade, business or investment purposes only qualify under section 1031. Apartments, if were rented out to tenants and was not used for personal purposes, would also qualify for tax deferrals under provisions of 1031.

Investors can purchase/sell more than one property at a time under the provisions of IRC section 1031 provided both are like-kind, and the entire money obtained from the sale are utilized to buy replacements. The money, if any, left behind after completing the deal qualifies for capital gain taxing. However, residential flats and dealer properties do not qualify under 1031 exchange. Also, non real estate entities such as inventory, notes, bonds, securities, stocks, debentures, etc are excluded from the purview of section 1031.

1031 Exchanges of Vacation Homes

Last week, the IRS provided guidance regarding 1031 Exchanges of Vacation Homes and conversions to or from Personal Residences. Revenue Procedure 2008-16 provides a "safe harbor" under which the IRS will not challenge whether a dwelling unit qualifies for a 1031 Exchange.

In short, a taxpayer must hold a dwelling unit for a minimum of two years before and two years after completing the exchange. Furthermore, in each of the two years before and after the exchange, the property must be rented out at fair market for at least 14 days and the taxpayer's personal use must be limited to 14 days.

Tenant-in-Common (TIC)

Tenants in Common (TIC) include some of the following benefits:

• The Scope for an Investment for larger properties.
• Purchasing investment properties as tenants in common (TIC) allows an investror to invest in a large amount of properties similar to warehouses, shopping centers, industrial property, etc. which generally will cost a few million or more.
• Allowing the diversifying of Real Estate Investments.

Being a Tenant in Common (TIC) gives the opportunity to investers to diversify their real estate investments as it is allows the ability to invest in more larger properties, rather than smaller properties. This also gives the potential of Increase in the Net Cash Flow. Ownership in Tenants in Common (TIC) properties gives the chance to increase cash flow, provides tax write-offs as well as property appreciation benefits. It is accomplished without a time commitment of active property management that otherwise is required, as the sole owner of the property.

The Nation’s Leading Real Estate Companies have a source of investment properties and acquires a fixed rate, non-recourse financing with terms for Tenants In Common (TIC) owners. With the Tenants In Common (TIC) property investment, may gain the access to select, national real estate companies, who look for the investment properties for you. The companies can be referred to as TIC Identification companies and they generally provides extensive due diligence on the part of investors. These real estate companies, the lenders and the security companies conduct an extensive due diligence on the investment properties being offered to Tenants in Common (TIC). During the time and resources necessary are being provided in a scale far larger than the most individual investors are capable.

Tenants In Common (TIC) investment property locaters use professional property and asset management teams to allow Tenant In Common (TIC) investors to have the benefits of real estate ownership, without the day-to-day property management.

Fundamentals of Section 1031 Like-Kind Exchanges

Basic Rules of a 1031 Exchange:
Fundamentals of Section 1031 Like-Kind Exchanges

To be eligible for a 1031 Exchange, both the relinquished and replacement property must be U.S. real property, which is held for investment purposes or used in the taxpayer’s trade or business. Equipment is not to exceed 15% of total value.

Property which cannot be part of a 1031 Exchange includes but is not limited to:

• A taxpayer’s personal residence, except perhaps that portion of it which is rented out or is the taxpayer’s home office.
• Property purchased or held for resale.
• Land which is under development.
• Inventory Property.
• Construction for resale or Fix n’ Flips.
• Beneficial interest in a partnership.
• Stocks, Bonds, or Notes.

1031 Exchange Information: Defining Like-Kind Property

When an Exchanger is exchanging real property, like-kind is one of the real advantages of 1031 exchanges. All real property is like-kind with all other real property. Like-kind refers to how the property is held by the investor, not the type or character of property. The Exchanger must have held the relinquished property for investment or for productive use in their trade or business and intend to do the same with the replacement property.

The following are some examples of like-kind properties:

• Residential relinquished property for commercial replacement property.
• Bank building as relinquished property in swamp land as replacement property.
• Bare land as relinquished property for residential rental as replacement property.
• Fee interest in relinquished property for 30-year leasehold in your replacement property.
• Single family rental as relinquished property for multi-family rental as replacement property.
• Non-income producing relinquished property for income producing replacement property.
• Rental house at the river relinquished property for a medical office in which the exchanger intends to practice as replacement property.

If the Exchanger is exchanging personal property the rules are far more restrictive. It is essential to consult with a tax advisor when structuring personal property exchanges since one transaction may have multiple exchanges, involving tax deferral on both the personal and real property. Personal property is considered like-kind only if it appears in the same General Asset Class or Product Class.

The Exchanger may exchange:

• Cement truck for a cement truck.
• Vending routes for vending routes.
• Cotton candy equipment for cotton candy equipment.

Their transfer that are not allowed for a certain property inventory or other property held primarily for sale, such as subdivided lots held for sale, and interests in partnerships or real estate investment trusts.

What the Heck is a 1031 Exchange Anyway?

1031 exchanges are designed to accomplish one simple goal: to avoid taxes. Property and/or business owners turn to 1031 exchanges to carry out a variety of business strategies. A retail owner might use an exchange to trade an old mall for a newer, trendier shopping center. In a more complex deal, an exchange can be part of an exit strategy for a partnership.

A 1031 exchange, owners defer the capital gains tax they typically pay in a property sale. To complete an exchange, an investor uses property instead of money as the medium for the transaction, essentially paying for the new property with the title of the relinquished property. The equity held by the investor in the new property must equal or exceed the equity held in the previously owned property. The key benefit of an exchange is that the investor is permitted to defer the 20% to 30% capital gains tax payments that would accompany a conventional sale.

1031 exchanges revolve around two absolute deadlines. Within 45 days of closing on the relinquished property, a 1031 trader must file a list of possible replacement properties with an intermediary. A firm certified to act as the closing agent for 1031exchanges. The second deadline occurs when 180 days after the initial transaction. The exchanger must close on a replacement property, using equity equal to or more than the equity in the original property. When and if you miss both of the two deadlines the IRS will send a capital gains tax bill.

In light of the deadlines and other issues that can complicate exchanges, a cottage industry of 1031 exchange advisors has emerged over the years. These advisors include qualified intermediaries that provide technical advice and closing services. The real estate brokers and net-leasing firms who help exchangers locate replacement properties, and accountants and attornies who provides special tax advice related to 1031 transactions.

The larger and more complex the 1031 transaction, the more important comprehensive expertise becomes. Sometimes, sellers use the 180-day deadline as leverage to raise the price of the property. In this reason, you never want to be in a situation where you must close on a particular property to protect your tax position and identifying multiple properties can be a serious part of successfully completing an exchange.

Safe Harbor Reverse 1031 Tax Exchange

A Safe Harbor Reverse 1031 Tax Exchange accommodates temporarily holding the new property for the exchanger until the old property is sold. In 45 days of this arrangement, the exchanger must identify this new property as being the replacement 1031 Tax Exchange property. This is the safest way to structure a Reverse 1031 Tax Exchange because it is clear that the exchanger does not receive any property prior to completing the transaction.

Personal property may qualify for Like-kind Exchange treatment. Since personal property for real property cannot be exchange because personal property is not like-kind to real property. Like-kind property is more restrictive and much more narrowly defined for personal property than the like-kind property standard applied to real property.

Real or personal property sold is one state that may be exchanged for like-kind property located in another state. These provide both are located used within the United States of America (USA). Domestic property can not be exchanged as non-domestic property since they are not considered to be like-kind property to each other.

A reverse tax-deferred like-kind exchange provides the Investor with the flexibility to spend as much time as needed to locate a suitable like-kind replacement property, without the pressure of the forward tax-deferred like-kind exchange deadlines.

Reverse 1031 Exchanges are a class of 1031 exchange that allows the exchangor, the person who owns the property, to first purchase a new property to replace an existing property, before selling the existing property. This type of exchange, when properly executed, also defers capital gains taxes.

The investors will decide whether to park the replacement property or relinquished property with the Exchange Accommodation Titleholder. This will vary transaction to transaction and not all Qualified Intermediaries/Exchange Accommodation Titleholders will administer both structures. It depends on whether the lender will allow the Exchange Accommodation Titleholder to acquire and park title to the replacement property when the lender is also using the same property as collateral for the financing.