Investing in a 1031 exchange requires an investor to identify a property 45 days before the exchange occurs. Investors may need more time to identify replacement properties and backup options within these strict 45-day days.
Investors can use Tenant in Common (TIC) structures to exchange properties for replacement properties of higher value. The property ownership requirements for TICs differ from those of Delaware Statutory Trusts (DSTs).
Tenancy in Common 1031 Exchange: What Is It?
Tenants in Common 1031 exchanges, also known as Tenancy in Common, involve two to 35 investors pooling their funds and agreeing to own one joint property bought through a 1031 exchange. In this arrangement, each contributor acknowledges a fractional interest in an entire property and a proportionate share of its income and growth. Because co-owners can have unequal stakes in a property, the amount invested can be flexible.
For each percentage interest in the property, investors receive a separate deed and title insurance and have the same rights and privileges as single owners. TIC arrangements allow co-owners to isolate or transfer their ownership interests in a property without the consent of their fellow co-owners. In comparison to other structures, TICs have this feature.
The following factors may increase the value of an investor’s portfolio through
TIC 1031 exchanges:
Different geographies offer different asset classes and property types for investment.
A hospital, warehouse, storage facility, high-end hotel, office complex, or apartment building can be purchased for millions of dollars.
Low investment thresholds: TICs also allow investors to invest smaller amounts. The investment threshold for each investor is lower since several investors can participate in the exchange, compared to an individual purchase of a high-valued property.
Example of a Tenants in Common 1031 Exchange
An owner of a small apartment building receives an offer of $700,000. As a result of the sale, they do not think they can afford a high-quality house with the money they received from the sale.
However, It is possible for the person to take this $700,000 in proceeds and purchase a 15 percent interest in a $5 million high-rise office building by investing in a TIC 1031 exchange.
The high-rise property might be out of reach for one investor, but a group of investors may be able to purchase it. A TIC 1031 exchange provides a way to roll debt and equity from the sale of the first property into a portion of interest in the high-dollar property. Other investors give the remaining funds to close the deal.
Here are some rules for TIC 1031 exchanges
For TIC 1031 exchanges to be successful, a few general requirements must be met. These include:
- A maximum of 35 people can be part of a TIC.
- If the property is redeemed, 100% of the money will need to be reinvested in the replacement property.
- An annual management agreement must provide market-rate compensation and be renewable.
- The TIC must maintain the right to transfer, partition, or limit its interest in the property and retain the right to vote and approve aspects of its management.
Co-owners must receive the remaining sales proceeds after the overreaching lien is satisfied.
TIC Drawbacks Reduced by Delaware Statutory Trusts
In the 1990s and 2000s, investors had many new opportunities thanks to the ability of property holdings held by TICs to defer taxes. On August 16, 2004, the Revenue Ruling 2004-86 permitted investors to use the fractional ownership structure of the DST as a replacement property for a 1031 exchange. For its benefits, DST has become increasingly popular since then.
Investors can reduce the drawbacks of TIC investments with the DST investment property structure. Investors can benefit from DST in the following ways:
- The number of investors in a DST structure is unlimited, whereas the number in a TIC structure is limited to 35. As a result, the DST can purchase more significant properties without making excessive investments.
- With DST investor interests, you don’t have to set up a single-member LLC like with TIC investment structures.
- Reducing their liability: The DST protects co-investors from liability concerning the property they hold and own. Unlike single-member LLCs, this structure eliminates the costs of forming and maintaining the entity.
Find DST and TIC Investment Opportunities With Investment.Org
Investors can defer taxes and limit their liability with DST property investments. Through TIC investments, investors can access a wide range of property opportunities for a low minimum investment. At Investment.org, we aim to match you with the best-in-class advisors who can help you reach your unique investment goals.
