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- What is a Tenant-in-Common?
- Why Choose a Tenants-In-Common Investment?
- Can retirement funds be invested in real estate?
- What do I have to do before I can invest these funds in real estate? Please explain the process.
- What are the tax consequences of real estate investments?
- Please explain the benefits of real estate related tax deferred income and depreciation.
- What is a 1031 Exchange?
- What is the primary benefit of a 1031 Exchange?
- What is a deferred/delayed Exchange?
- How much time do I have?
- What are the requirements to do a 1031 Deferred Exchange?
- What are some of the common reasons investors do not complete a 1031 Exchange?
What is a Tenant-in-Common?
When an exchanger wishes to complete a 1031 exchange, but does not want to exchange into another management-intensive property, one option available is for the exchanger to invest in a portion of a professionally managed, commercial-grade property along with several other investors. This is an investment structure called "Tenant in Common" or TIC. Tenant-in-Common is a form of holding title to real estate that allows investors to own an undivided interest in property, and thus, if structured properly, satisfying the 1031 requirement for "like-kind" property to be exchanged.
TIC investments are structured to defer capital gains taxes in accordance with 1031 exchange requirements. As a Tenant-in-Common (TIC) owner, you own an undivided interest in a property along with other co-owners.
For example, as a TIC owner in a multi-tenant industrial building, you share in the ownership of the entire property, not a specific tenant space. Likewise, if you owned a TIC interest in an apartment complex, you share in the ownership of the entire property, not a specific unit.
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Why Choose a Tenants-In-Common Investment?
TIC 1031 tax deferred exchanges provide more flexibility than a traditional 1031 exchange to the real estate owner through: flexible investment size, timing, additional diversification, and institutional real estate.
- A variable investment size matching an owner's equity and debt needs. Investments can range from $100,000 up to $10,000,000 and match the exact amount coming out of the relinquished property.
- The ability of having more investment options available during 45-day identification period.
- The opportunity to participate in larger institutional properties not normally available to individual investors.
- Owners receive current monthly cash flow, generally averaging 7-8% per annum, in addition to capital appreciation, depending on the individual investment property chosen.
- Pre-arranged, assumable, non-recourse, fixed-rate financing and easy approval. No leverage or up to 70% leverage available. Professional management of the property, including leasing, maintenance, rent collection, and financing activity allows the investor to have a passive role.
- Significantly reduced operating costs resulting from the managing company's ability to negotiate below-market pricing with vendors.
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Can retirement funds be invested in real estate?
Many types of retirement funds including IRA, Keogh, Roth IRA, and other self-directed retirement funds can be invested in real estate. See IRS Publication 590 for more details (http://www.irs.gov/pub/irs-pdf/p590.pdf).
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What do I have to do before I can invest these funds in real estate? Please explain the process.
Investors should consider using a firm offering IRA account administration services such as PENSCO Trust to establish a "self-directed" IRA account that facilitates the purchase of real estate. Information on establishing a self-directed IRA may be found at www.pensco.com.
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What are the tax consequences of real estate investments?
Income from real estate investments may be in the form of ordinary income, tax deferred income, capital gains income, or return of capital. Each income category has different tax rates and provisions for offsets and/or deductions that can reduce or even eliminate tax liability. Individuals should seek competent tax advice to assess the impact of related tax policies on their personal situations.
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Please explain the benefits of real estate related tax deferred income and depreciation.
Although most real estate appreciates in value, current tax policies permit investors to depreciate their investments in income producing real estate excluding the land portion over a period of years. In many areas in the U.S., the land value may be only 20% to 50% of the total value of the investment, so the depreciation impact can be significant. Rental income from real estate can be offset by the amount of allowed annual deprecation to produce "tax deferred" income - thereby allowing the investor to delay the payment of taxes on rental income until the property is sold. At time of sale, the depreciation is "recaptured." However this "recapture" is treated as a capital gain and may be offset against carried-over capital losses from previous years (e.g., stock market losses) thereby resulting in the reduction or even elimination of tax liability on the rental income in prior years.
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What is a 1031 Exchange?
A 1031 Exchange, also known as a "like kind" exchange, is a technique for deferring the gain on the sale of real estate by re-investing the proceeds in like-kind property.
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What is the primary benefit of a 1031 Exchange?
The primary benefit for owners disposing of business or investment property is the opportunity to defer the payment of income and capital gains taxes incurred in the sale of real estate.
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What is a deferred/delayed Exchange?
You surrender your property at one time and acquire the new replacement property no later than 180 days from the closing of the relinquished property, or the due date for the tax return for the year of the sale, whichever is earlier.
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How much time do I have?
You will have 45 days from the day you close your relinquished property (escrow) to identify the candidate(s) you wish to acquire; this is known as the Identification Period. You will then have an additional 135 days in which to close your replacement property purchase. You cannot exceed the
maximum 180-day period for the exchange to take place. This is known as the Exchange Period. The IRS has absolutely no forgiveness for missed time deadlines for any reason. Top
What are the requirements to do a 1031 Deferred Exchange?
The seller must dispose of either business or investment property. The seller must acquire other business or investment property of equal or greater value than the sale price of the relinquished property. Existing debt of the property being sold, and all of its equity must go into acquiring the replacement property.
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What are some of the common reasons investors do not complete a 1031 Exchange?
The desire of property owners to manage property tends to decrease over time. Even with good prior investment results, investors tend to tire of dealing with tenants and maintaining buildings. What they really want is the income and gain real estate can provide. Instead of managing their real estate, many investors choose to pay the tax so that they may travel, spend time in recreation or be with their families. Unfortunately, some investors' health considerations preclude their ongoing efforts to select, finance, and manage a replacement property.
Many investors have difficulty locating a satisfactory replacement property within the 45-day period permitted by the IRS regulations. This often arises due to heavy competition among investors for properties. Investors frequently limit themselves to their own, local markets or to property types with which they have had experience managing. Because of limited property inventories, investors also find it difficult to properly match the purchase price, debt, and equity so as to defer all of their gain.
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