These arrangements enable the budding real estate pro to utilize functions like a 1031 Exchange and cost segregation analysis more effectively than such traditional ownership vehicles as limited partnerships, limited liability companies, and S corporations— because Tenants in Common are treated more as independents than they are as central management.
Since 2001, the Tenants in Common industry has grown roughly 100% every year. By 2004, some $4 billion was invested in the Tenants in Common business, up from approximately $10 million in 1994. Why have TICs become so popular?
Newly minted real estate pros are awakening to liquidity options heretofore unavailable. Rapidly growing numbers of accredited investors are turning to Tenants in Common transactions to achieve rapid liquidity and to defer capital gains on their real estate holdings.
Other benefits of these transactions include professional management while being able to achieve cash flow, tax benefits, appreciation, and debt pay-down.
If two people, Joe and Randi, wanted to buy an investment property together and they're not related or married, they can use a New Smart Loan™ program to finance a TIC: they must structure the transactions as a TIC—which means they own their interest individually, not together.
The difference between a TIC and a rights of survivorship agreement is that under a right of survivorship arrangement, if Joe dies, his interest goes to Randi or vice versa. But under a TIC arrangement, Joe's interest goes to his estate and Randi's goes to her estate.
If I owned 50% of a real estate transaction and you want to buy my interest, you can't finance the half, you'd have to finance the whole transaction.
Tenants in common agreements afford a new investor a couple of advantages that will become apparent when we get into a discussion of exit strategies using a 1031 Exchange later in this chapter.
If the owner of a property with a realized profit in that property wants to utilize a 1031 Exchange, he or she has to identify another property to buy into in order to take advantage of a 1031 Exchange.
Let's say that you sell a property, realizing a profit of $300,000.
You must take the $300,000 to a qualified intermediary who holds all the money. (We define a qualified intermediary in a later chapter.) Then when you identify a new property, you can take that profit and buy into that new property and defer the gain. That is a potential tax savings of roughly $45,000 on the $300,000.
The owner of property ''A'' buys into property ''B'' for $300,000, deferring $45,000 in taxes. The buyer of property ''B'' can now buy into a TIC. This is important because if you have only $300,000, you may not be able to buy into another property for more than $300,000. The rule is you can buy equal or greater than the money you are putting in. So the $300,000 goes into a TIC. The transaction I just did has a minimum investment of$330,000.
We get back to the notion of exit strategy that we mentioned above.
Now you can get out of the property you're in and latch on to another property utilizing the method of 1031 Exchange. You can also use the TIC.
More and more the new real estate pro is beginning to use this very sophisticated instrument, the TIC.
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