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1031 TIC Resources

In this section you can find information on 1031 Exchange and TIC (Tenant in Common). If you have a question that you didn’t find the answer to below, we have a section on frequently asked questions page that may be helpful. We also have a links section that will take you to some very valuable information pertaining to 1031 Exchange and TIC.

1031 EXCHANGE

A 1031 exchange simply involves the sale of a property and the purchase of another property under certain guidelines. The result is the indefinite deferral of capital gains taxes on the sale. There are several different Exchange types as explained below.

EXCHANGE TYPES:

1. DELAYED EXCHANGE (often referred to as “Starker Exchange”) was codified in the 1984 Tax Reform Act; and it is by far the most common type of exchange. After the closing on the sale of your property you have 45 days in which to identify replacement property (or properties), and 180 days in which to close on the purchase of the replacement property.

2. REVERSE EXCHANGE is simply the reverse of a delayed exchange. This occurs when an investor identifies and purchases replacement property prior to the sale of property he relinquishes. Federal guidelines for a reverse exchange were issued September 15, 2000 so we have safe harbor rules to follow.

3. AN IMPROVEMENT EXCHANGE allows the investor to construct a new replacement property within certain guidelines including time constraints.

REPLACEMENT PROPERTY CRITERIA:

In order for a property to qualify for a 1031 Exchange it must meet the Internal Revenue Code Section 1031 which states: “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment”.

“Like-kind” means that real property can be exchanged for any other real property. For example, you can exchange raw land for an office building. A single family residence can be exchanged for a triplex. A whole interest may be exchanged for a properly structured tenancy in common interest. One property may be exchanged for more than one property. A vacation property or a primary residence may qualify as “like-kind” property, and qualify for tax free exchange treatment, provided certain guidelines are followed.

THE 45 DAY RULE:

This rule requires the Exchanger to identify a potential replacement property or properties within 45 days after the closing of the sale of the relinquished properties. You may identify properties under the a) 3 Property Rule (most common method) where you identify up to three properties regardless of fair market value, or b) the 200% Rule where you may identify more than three properties provided the fair market value of the identified properties does not exceed 200% of the fair market value of the property relinquished.  Note:  It is recommended to identify three properties in the event one or more is not suitable or cannot close.

THE 180 DAY RULE:

This rule requires the Exchanger to purchase the replacement property or properties within the earlier of a) 180 days after the transfer of the relinquished property or b) the due date of the Exchanger’s tax return (including extensions) for the year in which the relinquished property is transferred.

Qualified Intermediary (Facilitator)

In order to properly complete a 1031 exchange and defer capital gains tax, the proceeds from the sale of your property must be kept by a “Qualified Intermediary” until it is used for the purchase of a replacement property. We can assist you in finding a Qualified Intermediary to help facilitate the exchange.  Under no circumstances should you receive funds from the sale of the property as it will result in a taxable event.

TENANT IN COMMON (TIC)

Under Tenant in Common (TIC) ownership there is co ownership of a property by two or more investors. Title to the property is held by each owner as to their respective percentage ownership. Each owner has an undivided interest in the property and shares in his proportionate part of net income, tax benefits and appreciation. In brief, a TIC owner has the same rights and benefits as a single owner of property.

Although the TIC ownership form has been used for many years, its popularity has been increasing dramatically since the IRS issued Revenue Procedure 2002-22. Essentially this pronouncement gives guidelines for TIC replacement property ownership structure which, if followed, gives validity to the TIC arrangement for tax purposes. Such guidelines or conditions cover matters such as Voting Rights, Proportionate Sharing of Income, Management Agreements and the Co-ownership Agreement.

Exchangers often have difficulty in locating suitable replacement property, obtaining suitable financing, clearing title issues etc. within the 45 day identification period and the 180 day closing period. A properly “packaged” TIC investment significantly reduces these risks because it comes with financing and management already in place.  We have replacement property that meets the criteria needed to effectuate your exchange.