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Christina S. Porter
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| To contact Christina Porter, call her at 1-877-4TM1031, or e-mail her at Christina@TM1031Exchange.com for further assistance. TM 1031 Exchange specializes in assisting investors in planning and executing successful real estate investment strategies. Visit www.TM1031Exchange.com for a complete list of investment properties and to download a free 1031 exchange tool kit. TM 1031 did more than $100 million in successful 1031 exchanges in 2005.
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Articles by this Author
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IN YOUR SPACE
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Many Southern California property owners find themselves trapped by management responsibilities while earning only a fraction of the monthly income they desire. With good investment planning, they can frequently double and sometimes triple their monthly income, as well as reduce the risk of their investment portfolio and minimize management responsibly — all while avoiding taxes in the process.
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IN YOUR SPACE
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Many investors don’t take advantages of 1031 exchanges because of the fear of the 45-day identification period. That fear is supported by numerous horror stories of failed exchanges, resulting in the payment of devastating taxes.
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IN YOUR SPACE
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As mentioned in last week’s column, investors can significantly lower the risk of a failed 1031 exchange with proper planning and the right resources.
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IN YOUR SPACE
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There are a number of different resources an investor needs to successfully complete a 1031 exchange. The first step to a successful stress free exchange is developing investment objectives adjusted for risk.
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IN YOUR SPACE
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There are many things an investor must take into account when evaluating the pros and cons of an investment and specifically, how and if it will fit into their long and/or short term plan. A key component in an investment analysis is the relationship between risk and reward, and how best to maximize the reward and minimize the risk.
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IN YOUR SPACE
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Just what is a reverse 1031 exchange, how can it benefit an investor, and what are the risks involved?
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IN YOUR SPACE
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Investors should check with their tax advisors to make sure they have maximized their bonus deprecation before the valuable deduction ends.
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IN YOUR SPACE
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Anyone involved in investment real estate today is aware of the challenge in finding a replacement property that qualifies for a 1031 tax deferred exchange. In 2002, the IRS issued 15 guidelines under which investors looking for an exchange property would be permitted to utilize the Tenant in Common (TIC) ownership structure in order to provide an additional avenue for deferring the payment of capital gains taxes.
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IN YOUR SPACE
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Holding title as a Tenant In Common (TIC) is defined as a form of asset ownership in which two or more persons have an undivided fractional interest in which the ownership interests are not required to be equal, can be inherited and each co-owner has a separate deed. The IRS has provided 15 guidelines by which a TIC ownership interest will qualify for a tax deferred 1031 exchange. These guidelines can be found in Revenue Procedure 2002-22 and are as follows:
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IN YOUR SPACE
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A taxpayer’s ability to exclude and/or defer capital gains tax liability from the sale of a primary residence can be a powerful tool and deserves serious attention. Those gains, if dealt with properly, could be used to significantly increase an investor’s cash flow and ultimately the person’s net worth.
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IN YOUR SPACE
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In a 5 to 4 decision, the Supreme Court in January of 2005 gave city governments the broad power to seize private property in order to generate tax revenue. That means property owners will have more limited rights when facing the threat of their property being condemned via eminent domain, which is defined as “the power of a government to take private property for public use, usually with compensation paid to the owner.”
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IN YOUR SPACE
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There comes a time in many investors’ lives when they decide they would like to spend less time managing their real estate holdings and more time enjoying the rewards of their labors.
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IN YOUR SPACE
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A build-to-suit exchange, also known as an “improvement” or “construction” exchange, is a way in which the IRS allows an investor to use the proceeds from their relinquished property to build a property that fits their specific needs (build to suit), or to upgrade the improvements of an existing property prior to taking title.
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IN YOUR SPACE
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As interest rates continue to rise, we expect to see more seller financing — or seller carry backs — taking place. The motivation for a seller to carry back a note in exchange for a property typically is to facilitate a transaction that would not have happened with conventional financing at the price the seller is asking.
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IN YOUR SPACE
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One of the more significant benefits of investing in income-producing real estate is the ability to decrease the tax obligation on the income produced through depreciation, also known as cost recovery. Depreciation is defined as the recovery of the acquisition costs of IRS Section 1231 tangible assets, such as real and personal property.
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IN YOUR SPACE
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A basic requirement of a 1031 exchange is that investors take title to a replacement property in the same way that it was held by the relinquished property — the same name on the tax return. For example, if you held title to relinquished property as Fred Jones, you could not take title to the replacement property as Jones Investment.
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IN YOUR SPACE
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Diversification is one of the keys to preserving investor dollars while enjoying the benefits of investing in real estate. The advent of Tenant in Common (TIC) properties that are 1031 compliant has greatly increased the ability of investors to diversify their portfolio.
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IN YOUR SPACE
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Exchanges between related parties can be an effective estate planning tool. It’s important that the rules governing exchanges between related parties be understood and carefully followed to avoid having the exchange disallowed by the IRS.
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IN YOUR SPACE
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A common way to own investment real estate is as a member of a partnership. Being in a partnership has many advantages but does present a challenge if one of the partners wants to cash out using a 1031 exchange.
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IN YOUR SPACE
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It is generally understood that in order to take advantage of the tax deferral benefits of a 1031 exchange the guideline to be adhered to is that an investor must replace the relinquished property with one that is considered “like kind.”
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IN YOUR SPACE
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As with most transactions involving the IRS, there is more than one hoop an investor/taxpayer must jump through in order to insure a successful 1031 Exchange. Those hoops include making sure that a property qualifies, also known as like kind; the timing of the exchange; finding appropriate replacement property and making sure all appropriate governmental forms are filed.
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IN YOUR SPACE
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Investors’ primary attraction to what’s known as “tenant in common” is a desire to eliminate management responsibilities. However, the potential lack of control and liquidity causes them to shy away. Those same investors have built their wealth by managing properties themselves — for example, apartment buildings and strip malls. Investors are accustomed to maintaining control and the ability to make unilateral decisions. Lack of control and liquidity is perceived as added risk.
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IN YOUR SPACE
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A 1031 tax deferred property exchange is an exchange of like kind property in which capital gains tax deferral is available to people who sell their investment, rental, business or vacation real estate, and reinvest the net proceeds in other real estate. Real Estate held for these purposes are called like-kind, or 1031 properties.
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IN YOUR SPACE
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Here are some common questions about Tenants in Common (TIC):
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IN YOUR SPACE
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In the world of investment real estate the terms “Cash on Cash” (COC); “Capitalization Rate” (Cap Rate); “Gross Rent Multiplier” (GRM), are utilized by investors to compare various opportunities in the market place. It is important to remember that the higher the return the higher the risk.
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IN YOUR SPACE
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The ability to defer capital gain taxes on the sale of property has been around since 1921. In 1935, the Board of Tax Appeals approved the first modern tax-differed exchange using what’s known as “qualified intermediaries.”
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IN YOUR SPACE
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A properly structured 1031 Exchange provides real estate investors with the opportunity to defer 100 percent of both federal and state capital gains taxes on the sale of their existing properties.
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IN YOUR SPACE
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How and by whom a property is managed in addition to its economics are the “nuts and bolts” of any real estate investment. If the goal is to minimize management for income-producing real estate, there are three basic approaches — own a triple net lease property outright (the tenant does the management and pays a fixed monthly amount), invest in a fractional interest Tenant in Common that uses a Property Management Company or invest in a Tenant in Common that uses a Master Lease structure.
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IN YOUR SPACE
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When involved in a 1031 exchange, generally, expenses that are considered non-recurring, such as real estate commissions, will reduce the value requirement of the replacement property and not create a tax liability.
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IN YOUR SPACE
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Owning investment real estate as a Tenant In Common (TIC) provides investors with several advantages of which diversification and a lack of management responsibilities are primary. The two most common disadvantages involve the questions of liquidity and control.
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IN YOUR SPACE
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Owning investment real estate as a tenant in common (TIC) provides investors with several advantages of which diversification and a lack of management responsibilities are primary. The two most common disadvantages involve the questions of liquidity and control.
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IN YOUR SPACE
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The key to successful investing is understanding risk. All investments, by their nature, have risk associated with them. Understanding risk can be especially daunting if the investor is trying to transition into an asset class they are not familiar with.
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IN YOUR SPACE
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Many Southern California property owners find themselves trapped by management responsibilities while earning only a fraction of the monthly income they desire. With good investment planning, they can frequently double and sometimes triple their monthly income, reduce the risk of their investment portfolio and minimize management responsibility all while avoiding taxes in the process.
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IN YOUR SPACE
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Investment in commercial real estate can provide cash flow, appreciation or both. When assessing the likelihood of consistent cash flow or appreciation there are a variety of considerations.
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IN YOUR SPACE
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Holding title as a Tenant In Common is defined as a form of asset ownership in which two or more persons have an undivided fractional interest in the asset in which the ownership interests are not required to be equal, can be inherited and each company owner has a separate deed.
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IN YOUR SPACE
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Investors are attracted to Tenant in Common (TIC) investments for several reasons, including; reduced risk through diversification, the ability to own a small portion of a higher quality property that otherwise would be unavailable to them, little to no management responsibility and a high certainty of close (an important consideration when doing a 1031 exchange).
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IN YOUR SPACE
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Do you believe the IRS is Santa Claus? If your answer is “no", then read on.
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IN YOUR SPACE
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A 1031 exchange — also known as a “Starker” exchange or a tax-deferred exchange — permits investment property owners to sell a property and defer tax payments by reinvesting the proceeds into a “like-kind” investment property or properties. A 1031 exchange is enabled by Section 1031 in the Internal Revenue Code.
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IN YOUR SPACE
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A Tenant in Common (TIC) property generally qualifies as a replacement property for a 1031 transaction under the Internal Revenue Service Revenue Procedure 2002-22. Under this procedure there are 15 factors which determine whether a TIC interest qualifies as like kind replacement property. In general, the TIC investment must not be a partnership and each owner must have deed ownership, retain control over the management and maintain the ability to change management companies at least once a year.
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IN YOUR SPACE
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The strict and short timelines for 1031 transactions can be challenging for investors. The requirement to select replacement property within 45 days of the close of escrow of the property being sold must be carefully planned for. This is especially true if the investor is seeking replacement properties that require little or no management, such as Triple Net Leased (NNN) or Tenant in Common (TIC) properties. Even during a “slower” real estate market, attractively priced NNN and TIC properties sell quickly; and simply designating a property as a potential replacement does not mean it won’t be sold to another investor.
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IN YOUR SPACE
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A common way to own investment real estate is as a member of a partnership. Being in a partnership has many advantages, but does present a challenge if one of the partners wants to cash out using a 1031 exchange.
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IN YOUR SPACE
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A Tenants In Common (TIC) sponsor is an individual or entity that locates a property to buy “wholesale,” packages it and sells it to multiple investors at a “retail” price. The multiple investors hold title as Tenants in Common. The difference between the wholesale and retail price is what the sponsor is paid for their services. Typically this is between 5 percent to 7 percent of the total value of the investment.
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IN YOUR SPACE
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Investment real estate comes in all shapes and sizes. These “shapes and sizes” can be broken down to basic asset classes; each with a unique set of characteristics that address a wide range of investor needs.
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