A TIC is a form of real estate asset ownership in which two or more
persons have an undivided, fractional interest in the asset, where
ownership shares are not required to be equal, and where ownership
interests can be inherited. Each co-owner receives an individual
deed at closing for his or her undivided percentage interest in the
entire property. Through TIC ownership, the average person is able
to enjoy ownership in an institutional-type property with a minimum
investment.
What
are the benefits of TIC (Tenants-in-Common) ownership?
The TIC structure has various features that make it attractive
to the real estate buyer.
Access to Higher Grade Properties
- The typical entrance in whole commercial building
begins at $1 million, but through TIC Property ownership, the average
person is able to enjoy ownership in an institutional-type property
with a minimum purchase. Besides reliable income and growth potential,
TIC properties are able to attract tenants with greater financial
strength and stability than possible for the individual landlord.
Combined Real Estate Experience - As
an alternative to sole ownership of real estate, a 1031 buyer can take ownership
in a large commercial property along with other unrelated buyers, not as
limited partners, but as individual owners. Each of the TIC owners brings
their previous real estate knowledge to the group. Thus, each decision of
the TIC ownership will be backed by many years of real estate experience.
Lessee with an established history of
1031 experience in Real Estate - Most of the day-to-day property
operations are handled by the NNN PLUS lessee. The lessee has extensive experience
in real estate. Thus, situations that arise in day-to-day operations will
be addressed quickly and efficiently, and the TIC owner will enjoy the freedom
from property management.
Simple Management - The TIC owner avoids
the time and frustration of dealing with multiple tenants. You no longer
deal with "toilets, tenants and trash," and simply receive your
monthly rental income from your mailbox. Enjoy "tennis, travel and time
with family."
Exact Dollar Matching - In TIC properties,
you can purchase any amount above the minimum. For example, if you have $152,479
of equity from the sale of a previous property you can purchase $152,479
of equity in a TIC property.
Low Minimums - Revenue Procedure
2002-22 issued by the IRS allows up to 35 TIC owners in any one property.
Minimum purchase requirements are structured to meet this limitation and
can range as low as $150,000 equity.
Non-recourse Financing - The
mortgages on most of the TIC properties offered by FOR 1031 are non-recourse.
The TIC debt structure generally allows for the debt financing to assumed.
Assumption usually occurs without the need for qualification or loan assumption
fees.
Diversification - Due to the low minimums
in TIC properties, the buyer can decrease risk by diversifying into different
properties in various different marketplaces.
Speed and Simplicity - Speed and simplicity
are achieved due to the efforts of the FOR 1031 team. The negotiation process
is complete, and survey, rent rolls, etc. are already completed and available
for your review. After your review of all the due diligence used to acquire
your property, and upon your approval, you are ready to close. The closing
can be completed in days, not months.
No Closing Costs - Absent seller
default or other items outside the control of FOR 1031, closings are met
within the agreed upon time frame. FOR 1031 does not charge the TIC owners
any closing costs.
Deeded Interest - The TIC owners buy the
property and receive a deeded interest. You can transfer this interest by
gift, sale, inheritance, assignment, etc. Such transfer does not need to
coincide with the transfer of all TIC interests in the property. DBSI Housing,
if requested to do so by the TIC owner, will assist in the marketing of any
TIC interest.
No Special Allocations - All
the TIC owners receive monthly rental payments, sale proceeds and the depreciation
tax benefits in proportion to their percentage ownership in the property.
Impasse Resolution Procedure - On
a decision requiring unanimous vote, such as a sale decision, a 60% - 75%
(depending on your TIC agreement) vote by the TIC owners will be sufficient
to initiate the impasse resolution procedure. This procedure allows the TIC
owners with 60% - 75% (depending on your TIC agreement) or more of the property
to make an offer to buyout the dissenting owner with 25% or less of the property.
The dissenting TIC owners can either: (1) accept this offer, (2) buy out
the 60% - 75% (depending on your TIC agreement) TIC owners at the same price
per percentage ownership, or (3) change their dissenting vote to a consenting
vote.
Disclaimer: The above brief description is not to be construed
as legal or tax advice and is qualified in its entirety by the
actual closing documents. In case of any discrepancy, the actual
closing documents will control
Tenants-in-Common FAQs
Question: In a nutshell, what is
TIC (Tenants-in-Common) ownership? Answer: TIC ownership
combined with NNN leases provide the real estate buyer with the advantages
of ownership in a larger property, revenue and annual depreciation
benefits without many of the day-to-day management problems associated
with individually-owned rental property.
Question: What purchase amounts
are ordinarily required for TIC ownership? Answer: Revenue
Procedure 2002-22 issued by the IRS allows up to 35 TIC (Tenants-in-Common)
owners in any one property. Minimum purchase requirements are structured
to meet this limitation and can range as low as $150,000 equity.
The typical entrance in whole commercial building begins at $1 million,
but through TIC ownership, the average person is able to enjoy ownership
in an institutional-type property with a minimum purchase. Besides
reliable income and growth potential, these properties are able to
attract tenants with greater financial strength and stability than
possible for the individual landlord.
Question: What happens if fail to close on my 1031
exchange? Answer: You will have to pay your capital gains
taxes. Failure to close is the top reason clients reveal as to why
they pay capital gains. By identifying a TIC property, you can reduce
your potential tax risk, and avoid a failed closing. If you fail
to close on other identified properties, you are able to move all
your proceeds into the TIC (Tenants-in-Common) property you identified.
Question: Is there any liability
exposure associated with TIC ownership? Answer: The mortgages
on most of the TIC properties offered by FOR 1031 are non-recourse.
The TIC debt structure generally allows for the debt financing to assumed. Assumption usually occurs without the need for
qualification or loan assumption fees.
Question: What if I want to sell my TIC ownership? Answer:
On a decision requiring unanimous vote, such as a sale decision,
a 60% - 75% (depending on your TIC agreement) vote by the TIC owners
will be sufficient to initiate the impasse resolution procedure.
This procedure allows the TIC owners with 60% - 75% (depending on
your TIC agreement) or more of the property to make an offer to buyout
the dissenting owner with 25% or less of the property. The dissenting
TIC owners can either: (1) accept this offer, (2) buy out the 75%
TIC owners at the same price per percentage ownership, or (3) change
their dissenting vote to a consenting vote.
Question: What happens to my TIC ownership if I die? Answer.
Your ownership interest will pass to your heirs pursuant to your
will just like any other asset. Currently, the estate tax code provides
that they will also receive a stepped-up tax basis to fair-market
value, but you should check with your CPA or tax adviser because
not all circumstances are alike. The income taxes which were deferred
because of your 1031 exchange are potentially forgiven forever.
180 days – total
time allotted to acquire the replacement property. Must be
one of the properties designated in the identification period.
200% rule – you may identify
any number of properties as possible replacements
for your relinquished property as long as the aggregate
value of those properties does not exceed 200% of
the value of your relinquished property.
3-property rule – you may identify
any three properties for possible replacements for your
relinquished property. More than 95% of exchanges use
the 3-property rule.
95% exemption – you
may identify any amount of properties as possible replacements
for your relinquished property as long as you end up
purchasing at least 95% of the aggregate value of all
properties identified.
1031 exchange rules – the real
property you sell and the real property you buy must
both be held for productive use in a trade or business
or for investment purposes and must be like-kind. The
proceeds from the sale must go through the hands of a
qualified intermediary and not through your hands or
the hands of one of your agents or else all the proceeds
will become taxable. All the cash proceeds from the original
sale must be reinvested in the replacement property – any
cash proceeds that you retain will be taxable. The replacement
property must be subject to an equal or greater level
of debt than the relinquished property or the buyer will
either have to pay taxes on the amount of decrease or
have to put in additional cash funds to offset the lower
level of debt in the replacement property.
1031 timelines – Identification
period: Within 45 days of selling the relinquished property
you must identify suitable replacement properties. The
45-day rule is very strict and is not extended should
the 45th day fall on a Saturday, Sunday or legal holiday.
Exchange period: The replacement property must be received
by the taxpayer within the exchange period, which ends
within the earlier of 180 days after the date on which
the taxpayer transfers the property relinquished, or
the due date for the taxpayer tax return for the taxable
year in which the transfer of relinquished property occurs.
The 180-day rule is very strict and is not extended should
the 180th day fall on a Saturday, Sunday or legal holiday.
Accommodator – a qualified intermediary
who agrees to assist the exchanger to affect a tax-deferred
exchange. Also described as a facilitator or an intermediary,
a qualified intermediary cannot be the taxpayer, a related
party, or an agent of the taxpayer.
Adjusted basis – the
basis of the property adjusted for any capital improvements
or depreciation. To calculate the adjusted basis, take
the basis (the cost of the property) and add the cost
of any capital improvements made to the property during
the taxpayer’s ownership, and subtract any depreciation
taken on the property during the same time period. Once
the adjusted basis is known, gain or loss can be computed
on a transaction.
Amortization – a
gradual paying off of a debt by periodic installments.
Example: A $100,000 loan is arranged at a 12% interest
rate. The borrower pays $13,500 in the first year. Of
the payment, $12,000 is for interest, $1,500 for amortization.
After the payment, the loan balance is amortized to $98,500.
Boot – unlike
property included to balance the value of like properties.
Example: In an exchange of property under Section 1031
of the Internal Revenue Code, Collins exchanges her warehouse
worth $100,000 and receives Baker’s land worth
$125,000. Collins pays $15,000 cash and a car worth $10,000
to boot in order to equalize the values of the properties
exchanged. The car and cash are the
boot.
Capital gain – gain on the sale
of a capital asset. Since May 6, 1997, the maximum individual
tax rate on capital gains is 20%. There are limits on
the deduction of capital losses against ordinary income.
Example: Collins purchases land, for investment purposes,
for $10,000. Thirteen months later she sells it for $14,000.
She reports the $4,000 profit as a long-term capital
gain on her income tax return.
Capitalization rate – a
rate of return used to derive the capital value of an
income stream. The formula is value = annual income
capitalization rate Example: The estimated net operating
income of an office building is $12,000 per year. An appraiser
decides the appropriate capitalization rate is 12%, comprised of
a 10% return on the investment and 2% for depreciation. The estimated
value of the building is $100,000.
Deferred gain – in a tax-deferred
exchange, the amount of realized gain that is not recognized.
Example: Donald arranged a tax-deferred exchange in
which $1 million of gain was realized but not recognized
(that is, it was not taxed). The deferred gain of $1
million carries over to the newly acquired property
in the form of a reduced tax basis, to be taxed if
and when it is sold in a taxable transaction.
Delayed exchange – a
transaction in which a property is traded for the promise
to provide a replacement like-kind property in the near
future. The Tax Reform Act of 1984 allows investment real
estate or real property used in a trade or business to
be sold with the tax on the gain deferred, provided replacement
property is identified within 45 days and closed within
180 days. Other strict requirements must also be observed.
Depreciation (tax) – an annual
tax deduction for wear and tear and loss of utility of
property. Example: Tax depreciation allows a tax deduction
without a cash payment, thus providing an important benefit
to real estate investors. A tax depreciation deduction
may be claimed even when the property’s market value
increases. The annual tax depreciation deduction allowed
for improvements (land is not depreciable) is 3.64% for
rental housing and 2.56% for commercial and industrial
property.
Due diligence – 1. making a
reasonable effort to perform under contract. Example: A
prospective homebuyer signed a sales contract contingent
on the sale of her present residence. She is expected to
use due diligence in marketing her present house.
2. making a reasonable effort to provide accurate, complete
information. A study that often precedes the purchase of property,
which considers the physical, financial, legal and social characteristics
of the property and the expected investment performance; the underwriting
of a loan or investment. Example: The pension fund sent various experts
to perform a due diligence study of a property it was considering
for purchase. Matters to be considered included the mechanical and
electrical systems of the building, local market conditions and competition
for the property, and environmental hazards.
3. examination of property to detect the presence of
contamination. Example: Before lending on a shopping center, the
lender insisted on an environmental audit as part of its due diligence.
Escrow – an
agreement between two or more parties providing that certain
instruments or property be placed with a third party for
safekeeping; pending the fulfillment or performance of
a specified act or condition. Example: The deed to the
property and the earnest money were both placed in escrow
pending fulfillment of other conditions to the contract.
Principal – 1. the one
who owns or will use the property. Example: The principals
to the lease are the landlord and tenant; principals to
a sale are the buyer and seller.
2. one who contracts for the services of an agent or
broker, the broker’s or agent’s client. Example: Grey
wishes to purchase a shopping center. Grey engages Jamison, a mortgage
broker, to arrange financing. Jamison arranges a loan in the name
of the principal, Grey. The loan is payable as interest only for
5 years, with the principal payable as a balloon payment at the end
of year 5.
3. the amount of money raised by a mortgage or other
loan, as distinct from the interest paid on it. Example: Abel arranged
a loan with $100,000 principal on his home. The first monthly payment
is $1,200 including a $1,000 interest and $200 that amortized the
principal.
Stepped-up basis – an
income tax term used to describe a change in the adjusted
tax basis of property, allowed for certain transactions.
The old basis is increased to market value upon inheritance,
as opposed to a carry-over basis in the event of a tax-free
exchange. Example: Dooley dies, leaving land worth $100,000.
The land was purchased for $20,000, but the heirs receive
a stepped-up basis to the fair-market value at death. The
$80,000 unrealized gain to Dooley escapes capital gains
tax.
Tax-deferred exchanges – a tax-deferred
exchange is simply a method by which a property owner trades
one property for another without having to pay any federal
income taxes on the transaction. In an ordinary sale transaction,
the property owner is taxed on any gain realized by the
sale of the property. But in an exchange, the tax on the
transaction is deferred until some time in the future,
usually when the newly acquired property is sold.
Tenants-in-Common (TIC) – Tenants-in-Common
ownership is an undivided fractional interest in an entire
property.
FOR 1031 LLC — A
real estate principal based in
Boise
,
ID.
The company is the leader in providing 1031 Tenants-in-Common (TIC)
replacement properties. By specializing in institutional-quality
exchange properties for use in 1031 TIC real estate transactions,
FOR 1031 provides a means for the individual real estate owner to
participate in ownership of properties previously beyond their individual
financial ability.
Qualified intermediary – a person
or entity that can legally hold funds to facilitate a 1031
exchange. To be qualified, the intermediary must not be
relative or agent of the exchanging party. As an exception,
a real estate agent may serve as an intermediary if the
current transaction is the only instance in which the agent
has represented the exchanging party over the past two
years.
Replacement property
identification – 3-property rule: You
may identify any three properties for possible replacements
for your relinquished property. More than 95% of exchanges
use the 3-property rule. 200% rule: You may identify any
number of properties as possible replacements for your
relinquished property as long as the aggregate value of
those properties does not exceed 200% of the value of your
relinquished property. 95% exemption: You may identify
any amount of properties as possible replacements for your
relinquished property as long as you end up purchasing
at least 95% of the aggregate value of all properties identified.
Like-kind property – in a 1031
real property exchange, you can exchange any real property
for any other real property within the
United States
or its possessions if said property(ies) are held for productive use in trade or business
or for investment purposes. Examples of like-kind property include
apartments, commercial, condos, duplexes, raw land and rental homes.
NNN PLUS® lease – the
NNN PLUS® lease is a triple-net lease in which the
lessee completely leases the replacement property under
an escalating lease payment plan. The lessee takes on the
responsibility to sublet the property. The lessee’s
triple-net lease ends whenever the Tenants-in-Common (TIC)
vote to terminate it or, in any event, when the TIC owners
sell the property.
Triple-net lease – one
in which the tenant is to pay all operating expenses of
the property; the landlord receives a net rent. Example:
Big Buy Supermarkets enters into a triple-net lease. They
are to pay for all the taxes, utilities, insurance, repairs,
janitorial services and license fees; any debt service
and the landlord’s income taxes are the responsibility
of the landlord.
