BNI EQUITIES, LLC1059 East Iron Eagle Drive
Suite 155
Eagle, Idaho 83616
Voice: 208-639-7993
FAX: 208-639-7994
info@bniequities.com
1031 Exchange
A §1031 tax-deferred exchange preserves equity and may indefinitely defer capital gains taxes, provided you comply with strict IRS guidelines. Four parties are involved:
- The Exchanger
The party initiating an exchange to defer capital gains taxes on a relinquished property.
- The Buyer
The party acquiring the Exchanger's property.
- The Seller
The party selling a replacement property to the Exchanger.
- The Qualified Intermediary (Accommodator)
The third-party entity holding the Exchanger's sale proceeds for future disbursement upon the close of the replacement property acquisition.
Planning for your exchange is essential to its success. Call your financial planner/investment adviser/CPA as early as possible to develop your §1031 tax-deferred strategy.
The sale of a business or investment asset, whether it is real estate or capital equipment, can create a large tax liability. A properly structured tax deferred exchange under Internal Revenue Code ¤1031, however, allows businesses and individuals to defer the recognition of the capital gains or other taxes associated with the sale of most business or investment assets, as long as new assets are purchased to replace the existing assets. In general, most tax deferred exchanges are structured either as a real property or a personal property exchange. Real property exchanges include only interests in real property, while personal property exchanges encompass virtually all other types of property.
To be eligible for the favorable tax treatment afforded by an exchange, the property or business asset to be disposed of must have been held by the client for productive use in a trade or business, or for investment purposes, and be exchanged for like-kind replacement property that will be held by the client for similar purposes. With few restrictions, whether an exchange involves a parcel of real property, an airplane, a broadcast spectrum, or a fleet of cars, exchanges allow businesses and individuals the flexibility to sell property to whomever they wish, and to buy new property from whomever they wish. There is no requirement that property be "swapped" to be eligible for an exchange nor do exchange transactions require any significant changes to the terms of the sale and purchase agreements. By utilizing an exchange clients are able to maximize their capital by deferring the taxes that would otherwise be incurred on an outright sale of their property and use the entire amount of the equity from the exchange to acquire substantially more replacement property. Properly structured and administered, an exchange becomes an invaluable tax saving tool and an integral element of the business cycle.
Tenant-in-Common (TICs)
Tenant-in-Common is a form of holding title to real property. It allows the owner(s) to own an undivided fractional interest in the entire property. In addition, it has become the preferred investment vehicle for real property investors who wish to defer capital gains via a 1031 exchange and own real property without the management headaches.
A popular choice among real estate investors seeking replacement property for their IRC Section 1031 tax deferred exchange is Tenant-in-Common Ownership (TIC), also known as fractional ownership. Under this co-ownership structure, you will own an undivided fractional interest in an entire property and share in your portion of the net income, tax shelters, and growth. Further, you will receive a separate deed and title insurance for your percentage interest in the property and have the same rights as a single owner. Because TIC opportunities are often "packaged" with management and financing in place, TICs offer superior efficiencies in the identification, acquisition, financing, closing, and operating stages of real estate ownership.
Furthermore, fractional ownership provides you with the ability to diversify your 1031 Tax Free Exchange into more than one property and to participate in potentially larger, institutional quality properties. Thus, small investors in one area of the country may participate in large industrial, commercial, and residential property investments all around the country with professional management.
TIC investments provide simplicity by eliminating active property management headaches. Individuals who are tired of the day-to-day burdens of being a landlord or who own land and would like an income producing property will appreciate the benefits of a TIC investment. A TIC investment can save you time and money.
Benefits of Tenants In Common Ownership
The BENEFITS of investing in a Tenant In Common (TIC) structured property are quite compelling.
- Access to Higher Grade Properties
The typical entrance in whole commercial building begins at $1 million, but through Tenants In Common 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 property owner.
- Simple Management
TIC investment properties employ professional property and asset management, allowing TIC investors to enjoy the benefits of real estate ownership, without the day-to-day property management headaches.
- Exact Dollar Matching
TIC investments allow you to 1031 exchange your exact equity amount, investors can avoid paying taxes on boot when you cannot replace your TOTAL equity amount in a traditional replacement property.
- Low Minimums
Revenue Procedure 2002-22 issued by the IRS allows up to 35 Tenants In Common owners in any one property. Minimum purchase requirements are structured to meet this limitation and can range as low as $100,000 equity.
- Non-recourse Financing
In a TIC transaction, accredited investors assume non-recourse (no personal guarantee with standard “carve-outs”) financing on the TIC property. Debt on TIC offerings can range from zero debt up to 75% leveraged.
- Diversification
Due to the low minimums in Tenants In Common properties, the buyer can decrease risk by diversifying across different types and sizes of real estate investments as well as geographic markets.
- Speed and Simplicity
Because TIC opportunities are often "packaged" with management and financing in place, TIC investments may offer efficiencies in the identification, acquisition, financing, closing, and operating stages of real estate ownership.
- Deeded Interest
The Tenants In Common 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 Tenants In Common interests in the property.
- Extensive Due Diligence
Extensive due diligence is conducted on each investment property offered to Tenants In Common by the TIC Sponsor, the lender, and the securities industry. TIC Sponsors acquire (identify and locate, evaluate, arrange financing, etc.), manage (maintain, lease, collect rent, service mortgage), and sell the TIC properties. They have a vested interest in the performance of the property.
Source: Tenant-in-Common Association (TICA)
