Is this type of transaction the right fit for you? New England Real Estate Journal By Caleb Willis, Welton Street Investments

Real estate investors across America are asking the same questions: Am I receiving the cash flow that should be associated with the current value of my property? How can I reduce the headaches associated with managing my property? How should I handle the potential tax situation if I sell? While not appropriate for every-one, tenant-in-common (TIC) real estate investments may make sense for investors seeking an exit from their current appreciated real estate holdings. By investing in TIC offerings, investors are often able to improve the quality of their real estate assets and potentially increase their cash flow, all while reducing or eliminating property management headaches. The 1031/TIC Opportunity Since 1921, the Internal Revenue Code (IRC) has offered various tax deferral methods for investors seeking to defer capital gains taxes. One opportunity to build wealth and defer up to 100% of gains is by completing a tax-free exchange permitted under Section 1031 of the IRC. l031 exchanges have become a widely used tool for investors seeking to successfully defer tax on up to 100% of their potential capital gains. According to the IRS, in 2004 alone,1031 exchanges accounted for $297 billion worth of real estate transactions in the U.S.

A l031 exchange is a transaction in which a taxpayer is allowed to exchange one investment property for another on a tax-deferred basis. If investors do not fully comply with the 1031 guidelines, tax will generally be due at capital gains rates on any realized capital gains and at higher rates on any recapture of depreciation.

However, investors often find difficulties with complying with the strict 1031 exchange guidelines, such as locating a suitable “replacement property” within the required timelines. TIC investments have experienced strong growth because they address this and other problems with traditional 1031 exchanges.

What are TICs? TIC’s are a way of holding title to real estate, in which the investor has a deeded, fractional interest in real property. The investor generally receives monthly income and can take full advantage of the tax benefits enjoyed by investment property owners, namely deferral of capital gains, annual depreciation allowances and the potential appreciation upon sale of the investment property. The investor is a co-owner with up to 34 other investors and shares in both the risks and benefits associated with single ownership of real property.

The benefits include strong cash flow and general market appreciation without the management headaches that often come along with actively managing an investment property. TIC’s have seen strong growth since 2002, when the IRS issued Revenue Procedure 2002-22, which gave guidance to investors and clarified that TIC investments constituted “real property” for tax purposes and thus qualified for 1031 tax treatment.

Who is a likely candidate for TIC investing? Any investor with appreciated real estate seeking to eliminate active management, increase cash flow potential, defer capital gains taxes due, diversify their holdings and own interests in institutional-quality real estate assets may benefit from investing in TICs. The baby boom generation is expected to drive strong growth in the TIC industry given these advantages. 70% of individuals owning commercial real estate as investment properties are over 50 years old and are expected to retire over the next 17 years, according to Del Webb, a company focused on active adult living. This population will be exploring various passive 1031 exchange opportunities in order to preserve their wealth reduce risk through diversification and reduce active management headaches, and investing in a diversified set of TIC’s may accomplish all these goals. Investments in TIC’s have been attractive to individual investors with appreciated real estate for six key reasons:

Eliminate active management: TIC investments may provide “mailbox management” by simply receiving monthly distribution checks on their property. By moving to passive management, investors effectively eliminate their involvement by outsourcing the property management to a nationally recognized third party.

Effective tax deferral: Investors seeking to combine their TIC investment with a 1031 exchange can effectively defer up to 100% of any capital gains taxes and may benefit from further tax advantages on their net income.

Institutional grade property: Individual investors typically cannot afford to invest in larger, institutional type properties, such as class A office space or large retail centers. The fractional ownership of TIC investments enable smaller investors the opportunity to invest or exchange into these larger properties, often with attractive, credit-worthy tenants.

Asset diversification: TIC’s enable investors the ability to enhance the diversification of their investment portfolios, thereby potentially reducing the impact of changes in interest rates, inflation, location-specific challenges or general macro-economic conditions.

Risk reduction: TIC’s often allow investors the ability to move from a recourse loan on their current property to a non-recourse loan.

Increased cash flow: TIC’s often provide an increase in monthly cash flow potential when compared to investors’ monthly income generated from their current property.

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