TIC is an acronym that refers to Tenants-in-Common. A TIC investment simply means that two or more investors share ownership and fractional interest in a property that has been purchased through a 1031 like-kind exchange. Combined 1031 exchange TIC investments are typically used by investors to either build further wealth, diversify their portfolio or lower their own maintenance burden.
To understand what a 1031 exchange TIC investment is, it’s first necessary to be aware of what is involved in a 1031 exchange.
A 1031 exchange is an IRS process that enables property owners to defer up to 40% in taxes on the profits from the sale of their property. This is possible because the 1031 rules state that certain types of property can be exchanged for another, provided that they are like-kind. What this means is that both properties in the exchange must be of the same nature and/or character, even if they are different grades or different qualities.
For example, a single-family home can be exchanged for a duplex property, or one investment property can be exchanged for another, all while enabling you to defer paying tax on the profit that you make.
To prevent people from exploiting this process, there are strict rules and regulations surrounding it. For example, an investor who buys and sells properties – a technique called ‘flipping’ will have their properties considered stock in trade and will not qualify for the 1031 exchange.
Contrary to popular belief, a 1031 exchange isn’t a tax avoidance process. However, if you choose to continually replace your assets abiding by the rules set out for the 1031 exchange, it may be possible for you to defer tax on profits that you make indefinitely. These rules include:
Ensuring it is a like for like property
Performing the exchange through a qualified exchange facilitator
You meet the time constraints of the exchange, based on whether it is simultaneous, reverse, or delayed exchange
In a TIC investment, the tenants are all co-owners of the property, rather than being people who rent it (tenants in the traditional sense). There are four distinguishing features of tenants-in-common. These are:
All tenants hold an individual, undivided interest in a property
Ownership may be held in unequal shares
Each ownership interest may be separately sold or mortgaged
Upon the death of a tenant-in-common, the interest of the deceased will pass to their heirs who may choose to continue or sell
People who have an interest in a TIC investment will also be able to take advantage of 1031 tax deferral benefits provided that they reinvest directly in real estate (but do not apply if reinvestment is in a company, partnership, or LLC that owns the property.
IRS guidance states that TICs must meet certain conditions, including:
Being limited to 35 co-owners
Material decisions must receive unanimous approval by the co-owners
Co-owners must share (by ownership percentage) all income, expenses, debt service, and distributions
Sponsors may be reasonably compensated for orchestrating the transaction, but may not be paid based on profits or investor returns
If you would like to find out more about 1031 exchange TIC investments, contact Calturas Capital at (925) 744-7400 today.