The Challenge
Some investors hesitate to perform a §1031 exchange because the requirement to identify all replacement properties by the 45th day can be challenging to fulfill. In addition, it can be difficult to locate a second re-placement property of exactly the right equity/value needed for a fully deferred exchange.
The Solution – Tenants In Common (TIC) Property
A potential solution is to acquire a fractional ownership interest in a tenant in common (TIC) property ownership interest in a large commercial property with multiple owners. A TIC interest represents co-ownership between two or more investors. In essence, rather than owning 100% of a smaller property, the investor receives a separate deed to an undivided interest, thus owning a fractional interest in a much larger property. A properly structured tenant in common is not a joint venture or a partnership. Instead, each co-owner has the same rights as would a single owner. Generally, a “management agreement” or “operating agreement” links the co-owners together. Most tenants in common properties provide creditworthy tenants and steady monthly income.
Some investors have chosen tenants in common property ownership because they can enjoy the benefits of appreciation, cash flow, annual depreciation, and flexibility without management problems. In many cases, tenants in common programs provide the flexibility for an Exchanger to specify the exact amount of property that must be purchased to meet their specific exchange requirements. The column to the right highlights the advantages available to the average investor which in the past was previously reserved for large institutional investors.
Benefits Of Tenants In Common Ownership
- Geographic Diversification
- Excellent Value
- Financial Diversification
- Liquidity
- Professional Management
- Economic Diversification
- Existing Financing
- Flexibility
- Low Minimum Investment
- Predictable Performance
Potential Risks
Great care should be taken so that the TIC arrangement is not considered a joint venture or partnership. A partnership interest is specifically excluded from tax deferral treatment under Section 1031. An investor considering any tenants in common program should have their tax/legal advisors thoroughly review the proposed ownership arrangement to assess whether or not the structure will likely meet the requirements of IRC Section 1031. In addition, the investment itself and property management should be evaluated.
