In real estate investing, savvy investors seek strategies to maximize returns and minimize taxes. When considering selling properties to explore new opportunities or lighten management burdens, the 1031 exchange stands out.
This IRS-code section allows the deferral of capital gains taxes, enabling investors to transfer tax basis and defer gains from one property into another. One such exchange option is to sell the property and exchange it for another as Tenants in Common (TIC). In this article, I’ll explore 1031 exchange TIC facts to help you understand if exchanging into pooled real estate investment funds makes sense for your investment strategy.
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1031 Exchange TIC Overview
If you’re looking for 1031 exchange TIC information, it’s essential to understand how TIC works and why you would want 1031 exchange into a property as TIC.
What is TIC?
Tenants in Common (TIC) is a form of property ownership distinct from traditional ownership models. Rather than purchasing and owning property outright (sole ownership), a TIC structure involves co-owning a specific share of a property (or properties) and sharing ownership with two or more individuals.
It is also distinct from joint tenancy or tenancy by the entirety as TIC does not have a right of survivorship, meaning that upon the death of one owner, their ownership share passes to their heirs instead of automatically transferring to their surviving owners.
TIC arrangements are commonly used in real estate investment partnerships or when multiple parties wish to own a property while maintaining individual shares of ownership.
Tenants in Common vs. Other Ownership Types | ||||
The Intersection of 1031 Exchanges and TIC Structures
1031 exchanges defer capital gains taxes by enabling investors to sell a property and reinvest the proceeds into a new one. This flexibility extends to various property types and ownership structures, including TIC structures, while maintaining tax deferral benefits.
Investors can diversify portfolios with fractional interests in larger properties, like multifamily units, and reduce personal management responsibilities.
Benefits of 1031 Exchange TIC Strategies
- Tax Deferral: Investors can defer capital gains tax liability, in a 1031 exchange, by reinvesting sale proceeds into another property as TIC. This preserves funds within their portfolio, facilitating additional investment and portfolio expansion.
- Diversification: Fractional ownership through TIC structures affords investors access to larger or more expensive properties than they may have otherwise been able to afford. This diversification can potentially mitigate risk and enhance portfolio performance.
- Flexibility: Investors can utilize 1031 exchanges to enhance flexibility, enabling alignment with properties and partnerships that better match their financial goals and risk tolerance than their original properties allowed.
- Limited Liability: TIC ownership may offer investors limited liability protection as each co-owner may only be responsible for a share of the property’s liabilities. This shields them from personal financial risk beyond their own investment. Moreover, in TIC agreements held by third parties, investors may have little to no liability whatsoever.
- Professional Management: TIC arrangements often involve professional property management services, relieving investors of the burdensome responsibilities of day-to-day operations. Experienced property management companies will handle client relations, maintenance, repairs, and financial reporting tasks.
- Passive Income: Investing in properties as TIC shares enables investors to alleviate the personal burden of property management by distributing it among other investors. Doing so can transform their income into a more passive stream, requiring minimal hands-on involvement.
- Tax-Deferred Benefits: 1031 exchanges allow investors to defer capital gains taxes on selling the original property. By reinvesting the proceeds from the sale into a TIC property, investors can defer taxes until they sell their stake in the TIC arrangement, which allows for continued portfolio growth.
Like any investment strategy, 1031 exchanges and TICs carry some level of risk and require a base level of due diligence from investors. Make sure you consult with a tax professional or financial advisor before pursuing a 1031 exchange TIC strategy.
Canyon View Capital Offers 1031 Exchange TIC Opportunities
1031 exchange TIC strategies may be an ideal fit for numerous investors, particularly those interested in exploring multifamily real estate or seeking relief from the demands of daily property management.
At Canyon View Capital, we oversee a diverse portfolio of multifamily properties across the Midsouth and Midwest regions. We invite investors like yourself to exchange into one or more of our properties as TIC. This enables you to capitalize on tax advantages and enjoy genuinely passive real estate income without the complexities of property management.
Ready to upgrade your portfolio with diversified, stable investments?
Gary Rauscher, President
When Gary joined CVC in 2007, he brought more than a decade of in-depth accounting and tax experience, first as a CPA, and later as the CFO for a venture capital fund. As President, Gary manages all property refinances, acquisitions, and dispositions. He works directly with banks, brokers, attorneys, and lenders to ensure a successful close for each CVC property. His knowledge of our funds’ complexity makes him a respected executive sounding board and an invaluable financial advisor.
