How TICS Solve the 12 Major Problems Facing Real Estate Investors

1.  Must avoid capital gains taxes and depreciation recapture

Experienced investors use the IRS’ Internal Revenue Code (IRC) section 1031 tax deferred exchange whenever they sell their investment properties that have appreciated significantly in value.  This is because section 1031 enables them to defer all capital gains taxes and invest the total seller’s proceeds into another investment property.  There is nothing else like IRC section 1031.  It enables the investor/taxpayer to grow their wealth more quickly and encourages real estate transactions that drive the economy in many ways.

TICS meet IRC section 1031 exchange guidelines as detailed in IRS Revenue Procedure 2002-22

2.  Must find property that meets acquisition requirements

One of the biggest challenges for real estate investors is finding a property that meets the investors’ acquisition and exchange requirements.  There are many criteria that must be considered, and chief among them are:

The above questions, and more, are a great part of the challenge of modern real estate investors.  Depending on the investors’ sophistication, these issues are raised and satisfied to varying degrees.  Quite often, these issues are not dealt with or satisfied very well in a 1031 exchange and property purchase.

TICS are available in most all property types, quality, size, locations and net cash-on-cash returns.  They offer different risk and reward profiles, varied hold times, professional management and easy transitioning for most every type of investor.

3.  Must find property within 45 days of down-leg close of escrow

In addition to acquisition requirements, there are 1031 exchange requirements.  Foremost among the requirements is the IRS-imposed 45 day identification period.  The investor must identify, in writing to his qualified intermediary, also known as the exchange accommodator, a selection of properties that he is considering purchasing with his seller’s proceeds.  This is extremely difficult to do, since the investor has to search out and perform basic due diligence on available local, regional and national properties.

TIC properties are available nationwide, in a variety of markets, with complete due diligence packages available via FedEx within 24 hours after contacting the sponsor.  TIC properties can easily be identified within the 45 day period and close of escrow can usually occur within 30 -45 days after identification.  Also, the quick closing schedules of TICS enables the investor to start earning income sooner than later.

4.  Must arrange and get commitment for financing

If the investor/exchangor had a mortgage on the property that has been sold, then that debt must be replaced by arranging new debt on the up-leg property so the taxpayer will not have to pay taxes on the debt relieved.  Remember the 1031 exchange rule of thumb – “Debt relieved is boot received”.

Normally the arranging of a loan is not complicated, but today, in 2008, thanks to turbulence in the credit markets, the rates being charged by lenders is increasing.  Also, many lenders require more equity than in years past in order to get a loan.

TICS come complete with their pro-rata share of the debt used to acquire property as a part of the equity purchased. Qualifying is simple and most of the loans are non-recourse or partial recourse to the borrower.  TIC sponsors are usually much larger entities than individual investors, so they qualify for much better rates and more favorable terms than the individual investor could negotiate on their own.  TIC investors must merely qualify for “accredited investor” status, and therefore  simply have a stated net worth of 1 – 1.5 million dollars inclusive of primary residence and other investment properties, personal property, cash, cash-equivalents, CDs, stocks, bonds, investment accounts, retirement  accounts, precious metals and the cash value of life insurance policies.  They should have good credit scores and have a CPA and an attorney or financial advisor with whom they can consult.

5.  Property must meet debt and equity exchange requirements for a fully tax deferred exchange

Not only must the purchase price be equal to or grater than the sum the investor received when they sold their down-leg property, but they must also assume a debt amount equal to or greater than the debt that was relieved upon the sale of their down-leg property.  Any amount of equity from the seller’s proceeds that is not used, or any amount of debt relieved that was not replaced by new debt is considered “boot” and is taxable at the current capital gains rate plus applicable state taxes.

TIC equity comes with debt that is generally equal to or greater than that relieved in the down-leg transaction.  TIC equity can be precisely matched to the seller’s proceeds for a perfectly tax deferred exchange.

6.  Property must be of sufficiently high quality and value to preserve equity

One of the challenges facing investors today is that due to price appreciation, even small, ordinary properties have become expensive and risky by historical standards.  Most impacted by this price appreciation is the single family housing and condominium market.  This has impacted many real estate investors because this type of income property is the most common amongst real estate investors.  Investors/exchangors/taxpayers cannot find properties that make sense from a risk standpoint, from an income standpoint, from the lending standpoint and from the management and ownership standpoint.

TIC properties enable individual investors to take a relatively small amount of equity ($100,000 - $500,000 or more) and own a deeded, fee simple, title insured and undivided interest in a much larger, less risky, higher quality and stable asset than could be acquired for that amount of equity alone.  These properties maintain their value better than smaller properties in both good markets and bad.  These properties have a higher quality and number of tenants than smaller, sole-owned properties, to help assure a solid, stable and high quality monthly income.

7.  Property must provide income without management and ownership hassles

Most investors are either ahead of the baby boomer generation or part of it.  This is important because it means that one of the most important criteria that most real estate investors have today is the desire to significantly reduce the time and effort normally required of a real estate investor.  Investors today want to retire from active management.  They also want an exit strategy from real estate ownership, one that enables them to preserve capital gains through the use of tax-deferred 1031 exchanges, as well to continue to receive the tax-sheltered income from property ownership through the traditional filing of IRS form 1040, Schedule E, Income or Loss from Rental Real Estate.

8.  Property should provide total tax sheltering from income tax

Most investors are hard-pressed to meet this requirement, and in fact, most never hope to shelter all the income derived from their investment properties.

Many TIC properties can completely shelter all of the income derived from them through the benefits of segregated cost accounting. Segregated cost accounting segregates all 5 and 7 year property from the improvements in total, and details an accelerated depreciation schedule for these properties.  Examples of items entitled to accelerated depreciation are heating, ventilation and air conditioning equipment (HVAC), kitchen and bathroom fixtures and cabinetry, floor, wall and window coverings, electrical switches, wiring, fixtures, gates, fencing, parking lot components such as asphalt, slurry coatings, paint, covered parking structures, landscaping, hardscaping, pool and spa equipment, fitness-center equipment, furnishings, if any.

9.  Property must provide good chance of upside profit upon disposition

One key requirement for investors is upside profit potential.  The amount of expected profit depends on the quality and location of the property, the market in which it is located, the quality of property management and many other factors.  Profit also depends on the investor’s risk tolerance and the anticipated hold period for the property.

TIC properties are usually of a much higher quality than properties that can be acquired without the benefit of co-investors.  They therefore generally provide a much  better chance of upside profit upon disposition when compared to smaller, lesser, sole-owned properties.

10.  Property must be able to 1031 exchange again (aka “swap till you drop”)

Sole owned properties are readily exchangeable in subsequent 1031 exchanges.

TIC properties are readily exchangeable in subsequent 1031 exchanges.

11.  Property must provide certainty of close to ensure against a failed exchange and a taxable event

In many property transactions, one can never be certain of a close of escrow.  In fact, nationwide, about 25% of all real estate transactions never close, and that number is rising.  This fail-to-close rate applies to the down-leg of a 1031 exchange as well as the up-leg of an exchange.  Timing the two transactions can be difficult.  If the down-leg transaction closes, then the up-leg transaction must close or else the investor will have a failed exchange and a taxable event.  There are many reasons why up-leg transactions do not close but the key reasons are an inability to secure financing or an adverse discovery by the buyer during their due diligence period.

TIC properties are designed from the outset to satisfy the needs of 1031 exchangors.  The best sponsors have an outstanding record of closing escrow on transactions for their investors.  By the time a potential investor sees a TIC property, that property has been through the thorough due diligence of both the sponsor and the lender.  Therefore, there is very little in the way of traditional impediments to a successful close with TIC properties.

12.  Property must simplify wealth transfer to next generation or beneficiaries

One of the biggest challenges facing real estate investors is how to pass real estate wealth to the next generation.  Quite often, the children or other beneficiaries of real estate investors do not have an interest in real estate investment.  If they inherited investment real estate, they wouldn’t know how to manage it, they couldn’t grow the equity and they cannot or will not become real estate investors.  In order to prepare for the day when the real estate investor passes away, an exit strategy must be devised and implemented, one that coincides with the estate plan of the investor.

TIC properties solve this problem because the properties do not require the active management of the owners.  The properties use professional property managers, and most also utilize professional and experienced asset managers who perform oversight and auditing of the property management team.  If a TIC owner passes away, his property can pass to his beneficiaries and they can continue to receive the tax-sheltered income as well as enjoy the upside profit upon final disposition, as well as continue to execute tax-deferred 1031 exchanges well into the future for the benefit of the investors’ children, grandchildren, great grandchildren and beyond.