Tenant In Common 1031

1-877-812-1031

"TIC Definition"

What is a TIC? How is a TIC structured?

Typically, the sale of a real estate investment is a taxable event that triggers capital gains, but under Section 1031 of the Internal Revenue Code, those investing in income producing real estate may defer capital gains by exchanging their property for another. Section 1031 requires that the property exchanges be of a "like kind". In March, 2002, the Internal Revenue Service issued a release laying out the requirements for a tax deferred exchange of a single investment property for a TIC interest (tenant in common) in a pooled investment, with other investors. A major piece to the puzzle, of the release, is that an owner’s TIC interest may not be a partnership interest but instead has to be one owned individually with an undivided interest in the property. This IRS release became a major force behind the dramatic growth of TICs in recent years. There are others who even buy TIC interests without the purchase being part of a 1031 exchange, and this is also becoming more common place today (direct investors). In this case these individuals do not benefit from a tax deferral on these initial investments. TICs are typically offered by a sponsored involved commercial real estate property. The sponsor can be a broker dealer or an unregistered entity that offers a TIC in a single or collection of properties. Each offering has its own projected timeline, liquidity, management company and fees and of course, expected returns.

TICs Continue to Evolve as a Product with Popularity

TICs continue to evolve as a product and now may also be comprised of properties with oil, gas or mineral rights. TIC interests are generally considered to be investment contracts and constitute a security under federal law and they are generally a liquid security designed to be held for a number of years. Sponsors will generally structure TICs to be 1031 eligible so that they may appeal to both direct investors and those in a 1031 Exchange.

If a property is sold, for a profit, an investor would have to pay significant taxes on that profit. If the owner exchanged that property for a different real estate investment in a 1031 Exchange the taxes could be deferred. Finding a 1031 replacement property of exactly the same value and debt may be difficult. TICs can solve that problem of when the investor would have to pay significant taxes on the profit and sales of investments in Real Estate. Rather than trying to find another rental property of similar value, the owner can exchange the "sale proceeds" into a TIC valued at equal value or more.

Section 1031 coupled with a TIC product allows investors to pool their interests with others to acquire a property with greater value than each could afford separately. A member firm that sells TICs has a number of regulatory responsibilities in the sale of these non-conventional instruments. The firm must: conduct appropriate due diligence, perform a reasonable basis suitability analysis, perform customer specific suitability analysis for recommended transactions, insure that promotional materials used are fair, accurate and balanced, implement appropriate internal controls, and provide appropriate training for registered persons.

Dealing with Registered Representatives

Registered representatives should review the investor’s investment goals, current financial status, and investment timelines before making a TIC recommendation. When determining suitability, remember that TICS are generally illiquid and that there is not a secondary market for further sale of a TIC interest. you should also review whether the cost associated with TIC transactions outweigh the potential tax benefits. Direct investment customers are receiving no 1031 tax benefit and make sure to provide the appropriate disclosures about fees, liquidity and other potential risks. Fees vary from one TIC to another and can be difficult to understand. The fees extend beyond the purchase and the yearly fees, such as management company fees, and keep in mind that Section 1031 is very specific in unbreakable timelines associated with an exchange which should be taken into account in determining suitability. In many cases, a TIC interest will make up a large portion of an investors total assets. Due to the favorable tax treatment, investors may decide to invest the full amount, from the investment property sale, into a 1031 exchange. A concentration of assets in a "single asset class" may be unsuitable for many investors. When advising customers, members must consider the risks of over concentration versus the benefits of a potential tax deferral for a 1031 investment.

As sated above, a direct investor would have their own unique concerns, such as the payment of TIC fees without the tax benefits. Members should also consider the investment potential of the underlined real estate asset, as well as the reputation, track record and stability of the sponsor. It is important to know if the underlined assets can be switched with or replaced by other properties and whether a TIC success relies on multiple properties.

Who Should be involved in the Sale of a Tenant In Common 1031 Exchange?

Proper registration is also an important issue for TIC sales. Real estate agents may refer customers to broker dealers that offer 1031 exchanges and TICS. In some states, licensed real estate agents are required to participate in the transaction. A member may not pay referral fees to an unregistered entity. NASD rule 24-20 requires registration if a person engaged in the transaction receives compensation from it or participates in negotiations, structures security’s transactions or recommends security’s lawyers, under riders or broker dealers associated with security’s distribution. Firms should also ensure that representatives selling TICs are qualified. In general the series 7 or series 22 license is required and most states also require the series 63 state agents license. As with any security, a TIC transaction must be reviewed and approved by qualified principal following the members’ supervisory procedures.

Due diligence which should be performed on each TIC offering and TIC sponsors routinely get legal advice to see if the exchange would likely be treated as a Section 1031 exchange. Given the importance of tax treatment for TICs, a member should obtain a legal opinion that a TIC should or will qualify for exchange status. If a member can only obtain a ‘more likely than not’ opinion, the member must find out the specific tax status risks, and inform the investor of them. Members should reasonably verify the documentation from the sponsor does not contain false or misleading information. In addition, due diligence should include background checks of the sponsor’s principles, as well as reviewing property management and sale agreements and having the investment property inspected. Members should also insure that the TIC interest is a suitable product for their customer. To determine this, members must have a clear understanding of the product.

In Summary

In summary it is clear that investors should consult with an experienced and licensed individual before making any investment into a TIC offering. That individual should also have a history of due diligence and concern for their client's needs and objectives. Investing in a TIC is like investing into Real Estate, but many other risks can apply. Most local real estate attorneys and CPA's know little to nothing about TICs and how they are structured. If you need to be referred to a 1031 exchange professional, licensed in your state, call us. We will only refer you to someone that has experience and knowledge in the 1031 industry and education is the key to any good investment. This web site is just a referral web site and we will not be held liable for any misinformation or misrepresentation by any of our 1031 specialists.