1031 Exchange TIC: Everything You Need to Know

A 1031 exchange TIC, or Tenancy in Common, allows you to sell a property and defer paying capital gains taxes by investing in a new property with other investors.

You can use a 1031 exchange TIC to diversify your investment portfolio and reduce your tax liability.

A TIC is a type of investment where multiple investors share ownership of a property, but each investor has a separate interest in the property.

Each investor can designate their own replacement property, which can be a different property from the one the other investors choose.

To qualify for a 1031 Exchange, the sold and replacement properties must be of like-kind property type, held for investment purposes or used in a trade or business. This means they must not be primarily held for personal use or as inventory.

Accredited investors are required, which means they must meet certain financial requirements, such as having a net worth of at least $1 million (exclusive of their primary residence) or an annual income of at least $200,000 (single) or $300,000 (married) for the past two years with reasonable expectation of that income continuing.

A 1031 Exchange must be facilitated by a Qualified Intermediary (QI), also known as an Exchange Accommodator. The QI handles the transfer of funds and ensures that the exchange process complies with IRS rules.

The taxpayer who owns the relinquished property must also be the one who acquires the replacement property. In the context of a TIC 1031 Exchange, this means that the same taxpayer must hold the undivided fractional interest in the TIC property.

Here are the key eligibility requirements for a 1031 Exchange:

These requirements are crucial to ensure a successful 1031 Exchange and avoid costly penalties.

Investing in a 1031 exchange TIC can be a smart move for real estate investors.

Tax deferral is a primary benefit of a 1031 exchange, allowing investors to save a significant amount of money on capital gains tax. By reinvesting the proceeds from the sale of real property into a TIC, investors can keep more of their profits for reinvestment.

Diversification is another advantage of TIC investments. By pooling resources with other investors, individuals can access larger, higher-quality properties that might have been out of reach if they were investing independently.

Shared management responsibilities can also alleviate individual investors' day-to-day responsibilities of property ownership. A professional property management company or the TIC sponsor typically handles property management in a common structure.

TIC properties often generate income through rents or other revenue streams, providing investors with a potential source of passive income. This can be particularly attractive for those looking to supplement their retirement income or build wealth over a period of time.

Preserving equity in real estate is another benefit of investing in a 1031 exchange TIC. When an investor sells a property and uses the proceeds to invest in a TIC, they are preserving their equity in real estate, which can be beneficial for long-term wealth building and appreciation.

Here are the potential benefits of investing in a 1031 exchange TIC:

Structuring a 1031 Exchange TIC involves several key steps. The investor must sell their relinquished property and use a Qualified Intermediary (QI) to hold the sale proceeds. This ensures that the funds are not directly transferred to the investor, allowing the exchange to take place.

The investor must identify potential replacement properties within 45 days of selling their relinquished real property, and select an exchange replacement property from the identified properties and enter a purchase agreement. They must also form a co-ownership agreement with the other investors that outlines the rights and responsibilities of each party.

The investor must close on the replacement property within 180 days of selling their relinquished property. This timeline is crucial to ensure that the exchange is completed correctly and the investor can avoid paying taxes on the gain.

Here are some common financing options for a TIC 1031 Exchange:

A Tenant in Common (TIC) structure allows multiple investors to hold undivided fractional interests in real property. Each property owner has the right to use and possess the common property, and their common ownership share can be passed on to their heirs.

In a TIC 1031 Exchange, real estate investors can pool their resources to purchase a replacement like-kind property that meets the requirements of a 1031 Exchange. The investors become tenants in common of the new property, and each ownership percentage is proportionate to their investment.

Here are some common types of TIC structures:

It's essential to carefully weigh the pros and cons and consult with a financial or tax professional to determine if a TIC 1031 Exchange is suitable for your financial goals and risk tolerance.

Structuring a 1031 exchange involves several key steps. You must sell your relinquished property and use a Qualified Intermediary (QI) to hold the sale proceeds.

The investor must identify potential replacement properties within 45 days of selling their relinquished real property. This is a crucial step in finding the right property to exchange into.

You'll need to select an exchange replacement property from the identified properties and enter a purchase agreement. This is where you'll work with the seller to finalize the terms of the sale.

Forming a co-ownership agreement with the other investors is also essential. This outlines the rights and responsibilities of each party, ensuring everyone is on the same page.

Closing on the replacement property within 180 days of selling your relinquished property is the final step. This is a tight deadline, so make sure you're prepared.

Here's a quick rundown of the steps involved in structuring a TIC 1031 exchange:

Financing a TIC 1031 Exchange can be complex, but there are various options available to investors. One option is to use cash from the sale of the relinquished property or from personal savings to acquire a fractional interest in the TIC property.

Non-recourse loans are a common financing option for TIC properties, as they offer protection to individual investors from potential liability in the event of a loan default. This type of loan allows the lender to only pursue the collateral, not the borrower's personal assets.

Cross-collateralized loans involve pledging multiple properties as collateral to secure a loan for the TIC acquisition. This can be a flexible option, but it also increases the risk associated with the loan.

Seller financing is another option, where the seller provides financing to the investor. This can be attractive for investors who may not qualify for traditional financing, but it typically involves higher interest rates.

Some investors may choose to form a partnership or syndicate to pool their resources and jointly finance the acquisition of a TIC property. This approach can make it easier to obtain financing, but it also introduces complexity in terms of management and decision-making.

Here are some common financing options for TIC 1031 Exchanges:

It's essential to consider the tax implications of a TIC 1031 Exchange, including the handling of cash and debt. If there's any cash left over after the exchange, it will be taxable as a capital gain. Similarly, if there's a discrepancy in debt, the difference will be treated as boot and taxed accordingly.

Tax implications and rules can be complex, but understanding them is crucial for a successful 1031 exchange TIC. Depreciation recapture taxes may be triggered when selling a TIC interest, as the depreciation taken on the property reduces the cost basis.

Investors should be aware that their tax basis from the relinquished property is carried over to the replacement property, including the TIC interest. This means that the deferred capital gains tax and depreciation recapture will eventually be due when the replacement property is sold in a taxable transaction.

Special rules apply when exchanging depreciable property, and depreciation recapture can be triggered if the exchange involves unimproved land without a building. This can result in ordinary income being taxed.

Here are some key tax implications to consider:

Tax implications can be a major concern for investors looking to defer capital gains taxes through a TIC 1031 Exchange. You may be subject to depreciation recapture taxes when you sell your TIC interest.

Depreciation recapture can be a significant tax liability, especially if you've taken advantage of depreciation deductions on your property. This is because the depreciation reduces your cost basis, making more of the sale price subject to capital gains taxes.

Certain deductions, such as depreciation and interest expenses, can offset some of the taxable income from your TIC investment. However, passive income taxation means that you'll still be subject to taxation at your ordinary income tax rate.

Passive loss limitations can also apply to TIC investors, making it difficult to deduct losses from your investment against other income. This can be a major consideration when weighing the potential benefits of a TIC 1031 Exchange.

Here's a summary of the tax implications to keep in mind:

It's essential to understand these tax implications and consult with a qualified tax professional and financial advisor to determine if a TIC 1031 Exchange is right for you.

The Tax Cuts and Jobs Act (TCJA) made some significant changes to the 1031 exchange rules.

Before the TCJA, some exchanges of personal property qualified for a 1031 exchange, but now only real property, as defined in Section 1031, qualifies.

It's worth noting that the TCJA's full expensing allowance for certain tangible personal property may help make up for this change to tax law.

Exchanges of corporate stock or partnership interests never qualified and still don't qualify for a 1031 exchange.

Interests as a tenant in common (TIC) in real estate, however, still qualify for a 1031 exchange.

In a 1031 exchange, timing is everything. You must designate a replacement property within 45 days of selling your old property, and then close on the new property within 180 days.

You can't accept the cash from the sale of your property, or it will spoil the 1031 treatment. The intermediary will hold the cash and use it to buy the replacement property for you.

There are two key timing rules to observe in a delayed exchange: the 45-Day Rule and the 180-Day Rule. The 45-Day Rule requires you to designate the replacement property in writing to the intermediary within 45 days of the sale of your property.

The 180-Day Rule requires you to close on the new property within 180 days of the sale of the old property. The two time periods run concurrently, so you start counting when the sale of your property closes.

Here are the key timelines and rules to keep in mind:

In a TIC 1031 exchange, identifying replacement properties is crucial. You must identify potential replacement properties within 45 days of selling your relinquished property, and follow one of three identification rules: the Three Property Rule, the 200% Rule, or the 95% Exception Rule.

The Three Property Rule allows you to identify up to three potential replacement properties, regardless of their fair market value. The 200% Rule allows you to identify more than three potential replacement properties as long as their aggregate fair market value does not exceed 200% of the sale price of the relinquished property. The 95% Exception Rule allows you to identify any number of potential replacement properties as long as you acquire at least 95% of the total value of the identified properties.

In a reverse 1031 exchange, you can acquire your replacement asset prior to selling your relinquished property. This may be the only way to complete an exchange in a high-demand, supply-constrained market.