Are you tired of those midnight maintenance phone calls and worn out from hassling with your tenants? Perhaps you are frustrated because you are chasing rent checks and repairmen? Maybe you’d really like to sell your small apartment building but you dread the tax consequences. In fact, you may have thought about buying a piece of a new shopping mall, but you certainly can’t swing such a purchase on your own.
If that sounds like you, here's the good news. By utilizing a 1031 Tenants in Common Exchange, you can sell that apartment building, avoid the capital gains tax and still keep your money working for you. Tenants in Common, known as a TIC, is one of the best ways an investor can participate in ownership of one or more high quality properties, while preserving wealth and avoiding the headaches of property management.
Tenants in Common 1031 Exchange Allows Diversification
For example, say you sell a fourplex that you’ve owned for 15 years, and you have equity of $400,000. Depending on the amount of debt you still carry on it, the purchase price of your new investment could be around one million dollars. While that’s a lot of money, you still may not qualify to purchase a really top notch property alone. However, if you decide instead to invest in a TIC, that $400,000 of equity could purchase a million-dollar interest in a $30,000,000 institutional grade property.
A Tenants in Common 1031 Exchange allows diversification among several different properties at various geographic locations. You can invest in a warehouse, or storage units, a high-end hotel, or an office complex, a hospital or assisted-living facility, or an apartment building valued in the millions. This diversification may reduce the risk of your investment portfolio and could potentially increase its value.
IRS Rules for a Tenants in Common 1031 Exchange
The IRS rules for a 1031 Exchange must be meticulously followed to defer capital gains and depreciation recapture taxes. The Relinquished Property must have been held for investment or used in the owner’s trade or business.
Five general requirements for a potentially successful TIC 1031 Exchange are:
100% of the proceeds from the sale must be reinvested and the value of the commercial Replacement Property must be equal to or greater than the Relinquished Property.
- A Qualified Intermediary becomes the designated seller and holds all proceeds of the sale of the Relinquished Property.
- There is a 45-day identification period, during which at least three "like-kind" Replacement Properties must be identified in writing.
- The 200% Rule specifies that any number of Replacement Properties can be identified but their aggregate value must not exceed 200% of the Relinquished Property’s value.
- If the three-property rule and the 200% Rule do not apply, the aggregate market value of the commercial properties to be acquired in the exchange must comprise at least 95% of the total fair market value of all the identified properties.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.