Tenants in Common and 1031 Exchanges are the fastest growing real estate transactions occurring in commercial real estate. Tenants in Common (TIC) transactions have become more prevalent in the last two or three years: more and more people are choosing them over limited partnership or limited liability companies. They buy properties under an ownership title called tenants in common. 1031 Exchanges will be covered in the following two chapters.
Tenants in Common arrangements have become quite popular in recent days because the real estate industry has come to appreciate the great tax advantages that they offer. A TIC is a kind of joint tenancy that can be offered as a replacement property investment to 1031 exchangers. TICs have sponsors that purchase the property and apply for financing on the property. The properties are usually triple-net with A-rated tenants. TICs are at times sold as securities and sometimes as real estate.
The SEC considers TICs as securities (if not both securities and real estate). If it is considered a security, only a securities broker-dealer can sell it: investors are given special disclosures and protections.
Some TIC companies rely on legal opinions that TICs are real estate and not securities and can be sold directly by the sponsor. TICs are normally considered as a possible replacement property by investors who have managed a property (the relinquished property), but are looking for less active management in their replacement property.
A TIC transaction, also known as a Tenancy In Common investment or a Co-ownership of Real Estate (CORE), represents co-ownership of real estate by two or more investors.
The Tenants in Common arrangement is a kind of ownership in which two or more parties have an undivided interest in the property. The owners may or may not have equal shares of ownership, and there are no rights of survivorship. However, each owner retains the right to sell his or her share in the property as he or she sees fit. When two or more tenants own a property, if one owner dies, the other does not automatically take over the entire estate.
Tenants in Common arrangements enable people to have individual ownership of the property in question. We recommend that people buy real estate property using a TIC and that they especially do it through an entity known as a limited liability company. In other words, the person forms a single member LLC to purchase his/her interest as a tenant in common. The individual ownership of the LLC is viewed as a disregarded entity for tax purposes, which means that the tax benefits flow through to the individual but the individual is protected from liability using the LLC.
Most people don't understand that one big, big advantage of the TIC transaction is the ability to use a 1031 Exchange. That exchange enables someone to buy into larger projects, as a result of which they have the potential of deferring more taxes, rolling those tax deferrals into more properties over a period of time. TIC investors possess undivided interests in the property or designated interests of differing sizes.
As a TIC/CORE investor, you are on the deed and considered a direct owner of the real estate. You share ''pro rata'' in the income, tax benefits, and appreciation of the property.
Tenants in Common investment properties employ professional asset and on-site property management, guided by a Tenants in Common agreement, which sets forth the governance of the property and the decisions requiring a vote by the property owners.
When the person dies, the property portion is transferred to the decedent's beneficiary.
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