For a 1031 exchange, investors have an identification period of 45 days to select a property to relinquish. This strict 45-day period may not be enough time for some investors to identify potential replacement properties and backup options that meet the requirements.
A Tenant in Common (TIC) is a structure investors can use to exchange properties for partial ownership with high-value replacement properties. A TIC is similar to a Delaware Statutory Trust (DST) but varies in property ownership requirements. This article covers the terms for a TIC and its benefits and drawbacks.
Read on or skip to a specific section:
- What Is the Tenancy in Common 1031 Exchange?
- Example of a Tenants in Common 1031 Exchange
- Some Rules of a TIC 1031 Exchange
- How Delaware Statutory Trusts Reduce TIC Drawbacks
- Find DST and TIC Investment Opportunities With 1031 Crowdfunding
What Is the Tenancy in Common 1031 Exchange?
A Tenants in Common 1031 exchange — also called Tenancy in Common — is a co-ownership agreement under which two to 35 investors pool their funds and agree to own one joint property purchased through the 1031 exchange process. Each contributor owns an undivided, fractional interest in an entire property, and they participate in a proportionate share of the net income, tax shelters, and growth. The invested amount from each can be flexible since co-owners can have unequal stakes in the property.
Each investor receives a separate property deed and title insurance for their percentage interest in the property and has all the same rights and privileges as a single owner. In a TIC arrangement, co-owners have the right to isolate or transfer their ownership interest in the property without obtaining consent from the other co-owners. This feature sets TICs apart from other arrangements.
A TIC 1031 exchange allows diversification that may increase the value of a person’s investment portfolio due to:
- Property and asset class opportunities: Individuals can invest in several different properties at various geographic locations. Someone can invest in a hospital, warehouse, storage unit facility, a high-end hotel, an office complex, or an apartment building valued in the millions.
- Low investment thresholds: The TIC structure also allows lower minimum investment amounts from each investor. Since several investors can be involved in the exchange, the investment threshold for each is lower compared to purchasing a high-valued property individually.
Example of a Tenants in Common 1031 Exchange
Let’s say someone receives a $700,000 offer on a small apartment building they own. They have it in mind to make an institutional-grade investment, but with the amount of money from the sale, they don’t think they will qualify to purchase a high-quality property.
However, by investing in a TIC 1031 exchange, this person could take this $700,000 in proceeds and feasibly purchase a 15 percent interest in a high-rise office building worth $5 million.
Though individually, one investor might not be able to afford the high-rise property, a group of investors could purchase the property together. In this TIC 1031 exchange, all of the debt and equity from the sale of the first property can be rolled over into a portion of the interest in the high-dollar property as a TIC. The other investors provide the balance of the funds necessary to close the deal.
Some Rules of a TIC 1031 Exchange
Several general requirements must be met to have a successful TIC 1031 exchange. Some of them include:
- The number of TIC cannot exceed 35 persons.
- 100% of the proceeds from the first sale must be reinvested, and the value of the replacement property must be equal to or greater than the relinquished property.
- The management agreement must be renewable annually and must provide for market-rate compensation.
- The TIC must retain voting and approval power over aspects of the management of the property and must retain the right to transfer, partition or limit their interest in the property.
- If the property is sold, the debt that is secured by the overreaching lien must be satisfied, and the co-owners must receive a distribution of the remaining sales proceeds.
How Delaware Statutory Trusts Reduce TIC Drawbacks
The availability to defer taxes on the purchase and sale of TIC interests in property opened up many new opportunities for investors in the 1990s and 2000s. However, the Revenue Ruling 2004-86 on August 16, 2004, permits using the DST’s fractional ownership structure to qualify as an investor’s 1031 exchange replacement property. Since then, the DST structure has gained in popularity for its benefits.
The DST investment property structure offers several advantages for investors, reducing the drawbacks of TIC investments. With DST, investors can:
- Purchase larger properties: DSTs can have a limitless number of investors, whereas the TIC structure is limited to 35 investors. This setup allows the DST to purchase larger properties without causing high investment minimums.
- Own individual interests: DST investors become the beneficiaries of the property investment, eliminating the need to set up a single-member LLC like with the TIC structure.
- Reduce their liability: The DST protects co-investors from liability regarding the property held and owned in it. This setup saves investors the expenses from the formation and upkeep fees of single-member LLCs and simplifies the structure.
Find DST and TIC Investment Opportunities With 1031 Crowdfunding
A DST property investment offers several advantages to investors, including tax deferrals and limited liability. A TIC investment enables investors to access several property opportunities with a low minimum investment.
1031 Crowdfunding has a real estate investment platform for DST and TIC structured investments. Our experts will guide you through the DST process and find an investment property that meets your needs.
Register with 1031 Crowdfunding today to find DST investment opportunities for your portfolio and learn why clients trust our turnkey solutions.
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