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Click Here to read actual? stories about TIC and the Benefits.
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What is Tenant In Common (TIC)?
Tenant-in-Common is a form of holding title to real property. It allows the owner/owners to own an undivided fractional interest in the entire property. In addition, it has become the preferred investment vehicle for real property investors who wish to defer capital gains via a 1031 exchange and own real property without the management headaches.
A popular choice among real estate investors seeking replacement property for their IRC Section 1031 tax deferred exchange is Tenant-in-Common Ownership (TIC), also known as fractional ownership. Under this co-ownership structure, you will own an undivided fractional interest in an entire property and share in your portion of the net income, tax shelters, and growth. Further, you will receive a separate deed and title insurance for your percentage interest in the property and have the same rights as a single owner. Because TIC opportunities are often "packaged" with management and financing in place, TICs offer superior efficiencies in the identification, acquisition, financing, closing, and operating stages of real estate ownership.
Furthermore, fractional ownership provides you with the ability to diversify your 1031 Tax Free Exchange into more than one property and to participate in potentially larger, institutional quality properties. Thus, small investors in one area of the country may participate in large industrial, commercial, and residential property investments all around the country with professional management.
TIC investments provide simplicity by eliminating active property management headaches. Individuals who are tired of the day-to-day burdens of being a landlord or who own land and would like an income producing property will appreciate the benefits of a TIC investment. The TIC program gives you a "coupon clipper" or "mailbox management" investment that can save you time and money.
- Cash flow is generally paid monthly and is tax-sheltered via depreciation pass through and interest deductions. You may also share in the appreciation of the property when sold.
- Minimum equity requirements as low as $100,000 allow you to invest in high quality, institutional grade properties. Otherwise, it may be prohibitive for you to acquire property with a billion-dollar credit-worthy tenant guaranteeing a long-term lease. These low minimums also allow you to diversify, which can reduce your risk by allowing investments in different locations, with various property types, tenants, industries, etc.
- National real estate companies that structure these TIC programs acquire (identify and locate, evaluate, arrange financing, etc.), manage (maintain, lease, collect rent, service mortgage), and sell the TIC properties. They have a vested interest in the performance of the property. These companies have strong track records and extensive experience in all sectors, types, and locations of real estate.
- TICs enable you to replace the required debt on the 1031 when needed. Accredited investors assume non-recourse (no personal guarantee) financing existing on the property. You can invest in properties that have no debt or in ones with up to 75% leverage.
- TICs provide the flexibility to avoid the taxable boot if your preferred real estate doesn't allow you to meet the full debt and equity requirements.
- A ready inventory of TIC properties allows individuals to easily identify properties within the 45-day identification period, acquire within the 180 days, or have a "back-up" property in case their preferred real estate falls through.
The above information provided by the TIC Association website. More About?1031 TIC Exchanges...
A long-established section in the federal tax code, section 1031, allows real estate investors to sell property that has been held for investment purposes and defer capital gains and depreciation recapture taxes if they acquire "like-kind" property of equal or greater value and reinvest all of their equity.
Since the mid-1990s, many investors have experienced the benefit of reinvesting their equity into investment property interests structured as Tenancy-in-Common (TIC). TIC owners hold an undivided fractional ownership interest in investment property evidenced by a deed of trust.
TIC, also known as Co-ownership of Real Estate (CORE), enables an investor to participate in the ownership of institutional-grade, professionally managed properties. The investors equity can be diversified among several different properties, geographic markets and real estate companies, potentially increasing both the value and safety of the real estate investment. TIC/CORE investments are designed to offer preservation of capital, predictable cash flow and long-term appreciation in institutional-quality real estate assets that benefit from greater economies of scale.
With its features and benefits, TIC/CORE is an increasingly popular 1031 exchange option for many real estate investors. However, 1031 exchanges and TIC/CORE transactions are very complicated, with both tax and legal issues topping the list of potential pitfalls. It is therefore essential that investors be knowledgeable about what to look for in a quality advisor. Financial advisors are required by securities law to be properly licensed in order to consult clients regarding TIC/CORE transactions and other investment interests in real estate. Financial advisors should hold both Series 7 and Series 63 securities licenses to qualify them as knowledgeable, well-rounded consultants in the investment process.
There are almost 80 real estate companies across the United States that are either already involved or considering involvement in the TIC/CORE industry as a real estate provider. As with any industry, these 80 companies represent varying degrees of acumen, experience and quality. To achieve the greatest potential for a client, a financial advisor should have consistent access to the top ten percent of these companies in order to provide their client access to the best properties available.
Co-ownership is the fastest growing option for 1031 exchange investors seeking suitable replacement property. Properly structured and presented, such investments satisfy both the IRS "like-kind" requirements and the SEC and NASD securities regulations. The advantages of co-ownership of institutional-grade real estate are clear and compelling.
TIC Advantages
1. Low Minimum Investment
An estimated 40% of all 1031 exchanges involve capital amounts of $250,000 or less. The price of admission into the triple-net lease market typically begins at $1,000,000, thereby locking many 1031 investors out of this arena. However, TIC ownership is available for as little as $50,000.
2. Diversification & Safety
In a typical 1031 exchange, the taxpayer will identify three potential replacement properties and subsequently purchase only one. TIC ownership makes it economically feasible to identify and acquire ownership interest in many properties, thereby decreasing risk through diversification.
3. Flexibility
By identifying a TIC property as one of the replacement property choices, the taxpayer's entire proceeds can be applied to the TIC property if the other choices fall through. In addition, if there is money left unspent after another closing, the taxpayer can invest the "spill-over" money in the TIC property.
4. Decreased Tax Risk
Because an investment position in a TIC property can be reserved for a period of time after the identification period, the potential for paying capital gains tax because of a collapsed deal is decreased.
5. Existing Financing
Typically, TIC properties already have non-recourse financing in place and can be assumed without qualification or loan assumption fees.
6. Speed
A TIC closing can take place within days of identification by eliminating the negotiation process, the loan qualification process, the credit checks, and the appraisal work.
7. Liquidity
By maintaining a secondary market of TIC ownership interest, new investors can select seasoned properties, and existing owners can liquidate their partial- ownership interest.
8. Simplicity
A TIC investor receives a monthly check without the bother of day-to-day investment management.
9. Safety
TIC properties attract tenants with greater financial strength and stability than is possible for the individual landlord.
How Do I Find A 1031 TIC Exchange Property?
Typically, you buy a TIC property through a 1031 exchange sponsor company.
The best sponsor companies offer fully-managed institutional-grade properties. They have extensive experience in Securities Law, Property Management, Investment Structuring and Manketing. In addition they have a proven track record of high quality and well-screened residential and commercial real estate yielding a return of 7% or more.
We have experience with several high-quality TIC sponsor companies. Contact us and we will be glad to put you in touch with them.
Prudential California Realty is not affiliated with and does not endorse or guarantee any of the services or businesses identified above. The information regarding these entities is provided for informational purposes only. Prudential is not qualified to give legal or tax advice and client is strongly encouraged to investigate and verify quality of services provided by these businesses and contact its own experts for tax and legal advice.
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