What is TIC (Tenants-in-Common) Ownership and Why Should You Consider It?

TIC ownership is a form of real estate investment in which two or more people have a fractional interest in an asset. Ownership shares are not necessarily equal, and ownership interests can be sold or inherited.

Each owner receives an individual deed for his or her undivided percentage interest in the entire property. You, as an investor, could own 99% or you could own 1%. Under IRS Revenue Procedure 2002-22, up to 34 other investors could share ownership with you. (35 total)

Why is this beneficial to San Diego Real Estate Investors?

TIC ownership allows individual San Diego investors to hold an interest in institutional-type property while remaining free of the burden of management.

Such properties attract high quality tenants and are professionally managed and maintained. Rental income is generally reliable.

Low minimum investment and exact dollar matching…

IRS Revenue Procedure 2002-22 allows for a minimum investment of as little as $150,000 – and investments don’t have to be in exact multiples of the minimum. For instance, if the sale of your investment property netted $157,252 you could roll that entire balance into a TIC investment with a $150,000 minimum.

Ask us about current San Diego TIC Investment Opportunities

Our San Diego real estate investment specialists will be happy to show you what’s available. Just write td@tomdunlap.com or call us at 619-929-1413.


Note* The 1031 Exchange information on this site is meant as an overview and is not to be taken as tax advice. To determine how a 1031 Exchange would affect you, please consult your tax advisor and/or your tax attorney.

In a San Diego 1031 Exchange, What is “Like Kind” Property?

When exchanges were first introduced, they were actual exchanges between two parties who held very similar assets.

If you had a two story brick apartment building you had to exchange it for another two story brick apartment building. If your building was in San Diego, you could exchange for a building in another city, but it needed to be very similar in size and structure.

Over time, the definition has evolved, so that now “Like kind” simply means “similar in character or nature.” The property eligible for a 1031 exchange must belong to one of two property classes, and the exchange must stay within that class.

The two eligible classes are:

  • Property used in the taxpayer’s trade or business.
  • Property held for investment.

Today, you can exchange a San Diego single family rental for equity in a multi-story apartment building or even for a share in a TIC (Tenants in Common) property. Read more about Tenants in Common…

Want to know more?

Call 619-929-1413 and speak with one of our San Diego real estate investment specialists.


Note* The 1031 Exchange information on this site is meant as an overview and is not to be taken as tax advice. To determine how a 1031 Exchange would affect you, please consult your tax advisor and/or your tax attorney.

History of the 1031 Exchange

The first income tax law was enacted in 1918 – and it appears that it didn’t take long for politicians to begin adding loopholes to ease the tax burden for themselves and/or their cronies.

The exchange exemption was added to the tax code in 1921, under Section 202. It stated that there would be no gain or loss on exchanges of “like kind” property. At that time the definition of “like kind” was so narrow that one wonders how anyone ever used it.

If you had a two story brick apartment building you had to exchange it for another two story brick apartment building.

The code section was changed to 112(b)(1) in 1928, and then in 1954 Section 1031 was enacted. Section 1031 stated that: “No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged.”

Thus, in 1954 the definition of “like kind” shifted to something more like “similar.”

In looking at the 1954 tax code it’s clear to see why taxpayers wanted every loophole. The 24 income tax brackets ranged from 20% (for those earning $2,000 or less per year) up to 91% (If you earned $300,000).

But the whole process of finding two people who wanted to exchange was cumbersome. And that difficultly led to the Starker lawsuits – which led to today’s delayed exchanges.

In 1967 the Starkers entered into two similar agreements, one with the Longview Fibre Company and the other with the Crown Zellerbach Corporation
.
In both transactions the Starkers agreed to transfer timberland to the timber companies in exchange for a promise and credit in the amount of the value of the land transferred. The timber companies promised to acquire property of the same value and transfer it to the Starkers. This was to be done within a period of 5 years or the Starkers would be paid in cash. Both companies did acquire and transfer parcels to the Starkers, and the Starkers subsequently claimed exemption from tax under section 1031.

The IRS said “no way” and the cases went to trial. After two lawsuits were ultimately decided (in favor of the Starkers) by the appeals courts, new regulations approving delayed exchanges were added to the tax code in 1975.

Now it was no longer necessary for two parties to an exchange to be in current ownership of the properties to be exchanged. The Tax Court reversed this ruling in 1977, and the 9th Circuit reinstated it in 1979.

The next big change…

In 1984 Congress amended Section 1031 to allow sellers to place the proceeds of a sale with a qualified intermediary while they themselves identified property to be purchased with those proceeds. New regulations implemented the current 45 day identification period and the 180 day exchange period.

1991 revisions clearly defined “constructive receipt” and set restrictions on the identity of the qualified intermediary as a safe harbor.

In 2002 procedures were revised to clarify TIC (Tenants in Common) interests.

Today, a 1031 Exchange must be completed under the strict IRS guidelines – but it’s worth it.

Want to know more?

Call 619-929-1413 and speak with one of our San Diego real estate investment specialists.


Note* The 1031 Exchange information on this site is meant as an overview and is not to be taken as tax advice. To determine how a 1031 Exchange would affect you, please consult your tax advisor and/or your tax attorney.

A San Diego 1031 Exchange is Not a Do-it-Yourself Project

The information we’ve provided here is an over-view of a complex transaction that should only be undertaken with the aid of qualified advisors.

You’ll need a well-oiled team of San Diego professionals to assure your success:

  • A San Diego real estate agent who is familiar with the rules and regulations and who will help you work within the strict time frames required by the exchange.
  • An experienced, qualified tax advisor who specializes in 1031 exchanges and can help you determine your equity position in both the relinquished and replacement properties
  • A Qualified Intermediary – also known as a facilitator – to handle the proceeds of sale and prepare the paperwork.

The rules surrounding a 1031 Exchange are complex, and if broken will result in tax liability.

Do not undertake this project without qualified help.

If you’d like to exchange your current San Diego investment property for something different, but you’re not sure where to start, give us a call at 619-929-1413 or write td@tomdunlap.com.

Our San Diego real estate investment specialists will be glad to discuss your situation and put you in touch with other professionals who can and will help guide you.


Note* The 1031 Exchange information on this site is meant as an overview and is not to be taken as tax advice. To determine how a 1031 Exchange would affect you, please consult your tax advisor and/or your tax attorney.

In a San Diego 1031 Exchange, what does the word “exchange” really mean?

Most of us think of an exchange as a trade between two parties. School kids exchange an apple for an orange at lunch, new acquaintances exchange business cards, or a shopper returns an item to a store in exchange for a different item.

All of these exchanges involve another person or entity. And when exchanges were first introduced into the tax code, they did involve two parties who wished to “trade” properties.

All that changed in 1967 with the Starker lawsuits. (See: History of the 1031 Exchange.)

Today a 1031 Exchange involves one taxpayer who wishes to exchange his or her interest in one property for interest in another property.

What kind of San Diego real estate is eligible for a 1031 exchange?

1031 Exchanges deal primarily with 2 or the 5 classes of property:

  • Property used in the taxpayer’s trade or business.
  • Property held for investment.

In some instances a third class, vacation homes, may fall under the 1031 guidelines. Ask your tax advisor if your vacation home will qualify.

What are the other classes of property? Property held for sale to customers and property used as a taxpayer’s principal residence.

Want to know more?

Call 619-929-1413 and speak with one of our San Diego real estate investment specialists


Note* The 1031 Exchange information on this site is meant as an overview and is not to be taken as tax advice. To determine how a 1031 Exchange would affect you, please consult your tax advisor and/or your tax attorney.

Doing a Successful San Diego 1031 Exchange Means Following the Rules

When you want to exchange the equity in your San Diego investment real estate for equity in a property with even greater income potential, a 1031 Exchange will give you more equity to work with. You won’t be subject to capital gains tax on the profit – or on the depreciation you may have taken since acquiring your present property. Funds that would go to taxes in an ordinary sale can instead be rolled into your new investment property.

But you do have to follow strict rules, and one of those rules is that you as the seller may never come in possession of the proceeds of your sale.
 

A Qualified Intermediary must be appointed to hold the 1031 exchange proceeds, create the exchange, and prepare the legal documents.

This intermediary must be an uninvolved third party and may not be a relative or agent of the exchanging party, except that a real estate agent may serve as the intermediary if the current transaction is the only instance in which the agent has represented the exchanging party in the past two years.
 

Next are the timing restrictions.

Under the 1984 rule changes, the exchange may be delayed, but with time restrictions.

Property identification

Once your original San Diego investment property is sold, you have 45 days from the closing date to either close on or identify a potential replacement property or properties. Such identification must be in writing.
This time restriction is not negotiable, and the 45 days includes both holidays and weekends. If you wait until day 46, capital gains tax on your sale is sure to follow.

To complicate matters, you have some options in identification.

  • You can, of course, identify only one property.
  • You can use the 200% rule. Under this rule you may identify any number of properties as long as the aggregate value of the properties doesn’t exceed 200% of the value of the relinquished property.
  • You can use the 95% exemption. In this case you may identify any number of properties as possible replacements, but you must purchase at least 95% of the aggregate value of all the properties identified.

Of course, the 45 day “identification” period doesn’t prevent you and your San Diego real estate agent from doing your homework ahead of time. You can certainly pre-identify and inspect both the properties and the financials so you’re ready to act when the sale of your original property closes.
 

Closing on the replacement property

You have only 180 days from the closing date on your relinquished property in which to close on the purchase of the replacement property. Again, the restriction is not negotiable. 181 days won’t do.

And… if the due date for your income taxes falls within that 180 day time frame, that due date becomes your end date. Thus, it’s probably unwise to sell under a 1031 exchange after November 15 if your taxes will be due on April 15.
 

To effect complete tax deferment, the following three restrictions must be met.

1. The properties involved must be “like kind.”
2. The total purchase price of the replacement property must be equal to or greater than the total net sales price of the relinquished property.
3. All of the equity from the sale of the relinquished property must be used to acquire the replacement property.

The “like kind” rule is absolute. You may engage in a transfer that results in cash profit from the relinquished property, but in that case, tax will be due on any non-like kind profit – also referred to as “boot.”
 

What is “boot?”

“Boot” is the money or fair market value of any additional property received by the taxpayer through the exchange.

“Money” is taken to mean all cash equivalents, debts, and /or liabilities to which the exchanged property is subject. Determining the relative liabilities and their effect on your transaction is a job for a knowledgeable San Diego CPA, working in conjunction with your tax advisor.

“Additional property” could be taken to mean any property which is not “like kind.” For instance, a personal residence or vacation property not used in the taxpayer’s trade or business and not held for investment.
 

To learn more, just call…

If you think a 1031 Exchange might be right for you, call 619-929-1413 and talk to one of our San Diego real estate investment specialists. We’ll be happy to give you more information and help you determine the value of your current holdings.


Note* The 1031 Exchange information on this site is meant as an overview and is not to be taken as tax advice. To determine how a 1031 Exchange would affect you, please consult your tax advisor and/or your tax attorney.