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Backstep Into Your Investment Property

By James Burns - Email Editor

Date : 13-Feb-2007

Dear Subscriber:

Several wise investors have been making a Tenant-in-Common 1031 a part of their exit strategy from their investment property. Don’t confuse tenant-in-common deals with REITs. Tenant-in-Common 1031 exchanges provide a way for a real estate investor to defer capital gains taxes on the sale of investment property by joining with other investors in large multi-million dollar properties. The investor gets a deeded interest and title in the replacement property.

Among IRS requirements for a 1031 exchange: An investor’s replacement property must be of equal or greater value than the one sold, a seller must identify a potential exchange property within 45 days of the closing of the sale and complete the exchange for one or more properties within 180 days of that closing, and an independent third party (qualified intermediary) must prepare legal documents for the exchange and hold the money. Investors may do their own tenant-in-common 1031 exchanges, but this would not eliminate the headaches and liabilities involved with managing an investment property.

Sponsored Tenancy In Common (TIC) arrangements might appeal to clients who want to do 1031 exchanges but don’t want to actively manage real estate any longer.

The Internal Revenue Service has long maintained that like-kind exchanges of interests in partnerships, REITs or other business entities, which often are set up to hold real estate and investments that are more passive, don’t qualify for capital gains tax deferral under Section 1031. However, real estate owned by tenants-in-common does qualify, and companies have packaged ownership of multi-million dollar, triple-net-leased commercial properties into tenant-in-common units of as little as $100,000. Triple-net-leased properties often are rented to Fortune 500 type companies or the government with good credit that are responsible for paying all expenses, including property taxes, maintenance, utilities and so on. As a result, investors can get a steady stream of rental income without having to actively manage the property.

The IRS issued Revenue Procedure 2002-22, which specifies the conditions that must be met for it to issue a private-letter ruling saying a TIC is an undivided fractional interest in a rental property and not an interest in a business entity, such as a limited partnership. Many players believe this announcement will accelerate the trend of using TICs as replacement property in 1031 exchanges.

TICs may make sense for some buyers, particularly if it’s a good property. But investors need to find the right TIC provider to avoid fees, which can be significant, as much as 15% to 25% of the initial investment. Also, returns quoted often incorporate the tax deferral an investor would get by doing a 1031 exchange.

We have access to a TIC company that pays the investor a 6.5% cash-on-cash return monthly the first year and escalates periodically. The tenants of the buildings are on triple net leases paying all costs and expenses associated with the property.

You would receive all the appreciation, depreciation and increase in equity from debt service pay down. There are no closing costs…100% of equity is working for you from day one. These are likely costs for using an accommodator who acts as intermediary between your sale and equity purchase so that the exchange is at arm’s length and in line with 1031 law.

This is a quick example based on $300,000 equity purchase (minimum):

This is a safe (no lawsuit) solution for exiting out of performing or non-performing (raw land) property.

There are even joint venture opportunities that have projected average annual returns of 21% but require larger equity purchases e.g., $1.5 million per 3 investing entities (LLC) and a maximum of 10 individual investors. Each Joint venture has different requirements and may necessitate $4,000,000 in total equity investment or more.

If you are looking for a quality real estate investment with no liability or want to exit your current raw land or other investment property, please contact us at info@trustmakers.com to examine what is available as an investment or tax solution for you.

James Burns, Esq.

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