Advantages of 1031 Tenant In Common Exchanges

A popular option for real estate investors looking to engage in a 1031 exchange is a Tenancy in Common (TIC) arrangement. Section 1031 of the Internal Revenue Code permits real estate owners to defer taxes and gains if they acquire “like-kind” replacement property of equal or greater value, as well as exchange property held for investment or productive use in a business or trade. TIC properties are a great option for those looking for passive cash flow, diversification, and a more conservative investment.

TIC arrangements provide many advantages to real estate owners who want to participate in a 1031 TIC exchange – especially those with less funds. Some of the benefits that these individuals get from the arrangement include:

1. Low Minimum Investment
An estimated 28% of all 1031 exchanges involve capital amounts of $500,000 or less. The price of admission into the triple-net lease (NNN) market typically begins around $1,000,000, thereby locking many 1031 investors out of this arena. However, TIC ownership is available for as little as $50,000 and gives these exchangers access to investment-grade real estate and the passivity provided by NNN properties.

2. Diversification & Safety
In a typical 1031 exchange, the taxpayer will identify three potential replacement properties and subsequently purchase only one. TIC ownership makes it economically feasible to identify and acquire ownership interest in many properties, thereby decreasing risk through diversification.

3. Flexibility – Leftover Funds or a Backup Plan 
Many people also consider a TIC 1031 exchange because of the flexibility of TIC’s. By identifying a TIC property as one of the replacement property choices, the taxpayer’s entire proceeds can be applied to the TIC property if the other choices fall through. In addition, if there is money left unspent after another closing, the taxpayer can invest the “spill-over” money in the TIC property.

4. Decreased Tax Risk
Because an investment position in a TIC property can be reserved for a period of time after the identification period, the potential for paying capital gains tax because of a collapsed deal is decreased.

5. Existing Financing
Typically, TIC properties already have non-recourse financing in place and can be assumed without qualification or loan assumption fees.

6. Speed
A TIC closing can take place within days of identification by eliminating the negotiation process, the loan qualification process, the credit checks, and the appraisal work.

7. Liquidity
By maintaining a secondary market of TIC ownership interest, new investors can select seasoned properties, and existing owners can liquidate their partial- ownership interest.

8. Simplicity
A TIC investor receives a monthly check without the bother of day-to-day investment management.

9. Safety
TIC properties attract tenants with greater financial strength and stability than is possible for the individual landlord.