The 1031 Tenants in Common Exchange Can Help with Your Rental Woes

It is not easy to maintain a rental property. You would be subject to maintenance calls and even noise complaints. There would be possible damage to the property and even commotion arising from errant behavior. It is not a venture for the faint of heart.

Many property owners have thought about placing their property for sale, but could not do so because they still have existing tenants. If the owner is already eyeing a different property, there are options, such as the 1031 exchange TIC for properties, which can be beneficial for both parties.

What is a 1031 Exchange?

In simple terms, a 1031 exchange allows the owners of investment real estate to defer their total or partial capital gains tax by reinvesting the resale proceeds. There are a complex set of rules and also different categories, but the basic rule is that you can defer the gains through a 1031 exchange if the amount of the new property is higher than the sale price of the old property. All cash from the sale should also be invested in the purchase. If these conditions are not fully satisfied, some of the tax would still be owed.

Rental property owners can utilize a 1031 Tenants in Common (TIC) Exchange, wherein you can sell the rental property or apartment building, avoid the owed capital gains tax and still end up having your money to work for you. The TIC is the closest to a win-win situation since an investor can participate as a part of the ownership of one or multiple high-end properties and gets to keep the wealth while avoiding the hassle of property management.

Diversification through TIC Exchange

man with a drawing of a yellow house above him

To illustrate a specific example, let’s take a property owner of a four-door apartment which he has owned for 15 years, and has equity of $400,000. If the purchase price of the new investment he is targeting amount to around one million dollars and he still has a sizable amount of debt carried on it, he might not be able to purchase a high-value property alone. He can decide to invest in a TIC instead so that $400,000 of equity could be able to acquire a million-dollar interest in as high as $30 million of fair grade property.

There is much diversification for the Tenants in Common type of 1031 Exchange. One could own several different properties at various locations. It does not matter if the investment is in a warehouse, or storage facility, a five-star hotel, or even an office building. You can even invest in a hospital. This can increase the value and reduce the risk of your investment portfolio.

Limitations for TIC Exchange

There are some limitations and governing conditions for TIC exchanges. There should be less than 35 owners of a property, and if there is any resale, refinancing, leasing and management hiring, there has to be a unanimous concurrence from all the owners.

The co-owners can hire a manager to operate the property and the basis of compensation could be the gross rental income instead of the profits or investor return. The owners will retain the final decision-making prerogative.

The 1031 exchange law has given options for the property owners, so they could have flexibility with their property and finances. It is best to learn and understand the provisions of this law to have the best opportunities open.