TENANTS IN COMMON PROPERTIES (TICS) SAVE YOUR 1031 EXCHANGE & MAXIMIZE YOUR INCOME FOR DECADES

TENANTS IN COMMON PROPERTIES (TICS) CAN SAVE YOUR 1031 EXCHANGE AND THEN MAXIMIZE YOUR INCOME FOR DECADES TO COME

If you're a potential 1031 exchangor, you know that if you cannot complete a 1031 exchange, you must pay capital gains taxes and likely also, depreciation recapture.  In such a case, you will be forced to give the IRS all of your hard-earned equity (cash) forever and you will be left with only one-fifth of the income that you could otherwise earn by using a 1031 exchange into a TIC or other high income property.  This is because after the first major defeat of paying these taxes, your after-tax choices are dismal, limited to short-term US Treasury Bills, bank CDs, securitized money market funds, stocks or mutual funds.  See table of current interest rates here http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.html

Also, if you do not complete a 1031 exchange, you will lose all FUTURE opportunities to do a 1031 tax-deferred exchange stemming from this equity.  In other words, you give up the tax benefits and income and equity growth for the rest of your life and possibly the lives of your children and grandchildren -- this represents a significant, long-term and permanent loss.

COMPARISON OF TIC PROPERTY & 1031 EXCHANGE VS. TYPICAL AFTER-TAX INVESTMENT

If you do not complete your 1031 exchange and you end up paying capital gains taxes, state taxes and depreciation recapture, even while you earn much less income on the after-tax proceeds, you will also pay much more in taxes on a percentage basis on that income, than if you bought a TIC property and earned tax-sheltered income from it via through segregated cost accounting.  That's because there is no sheltering of interest income beyond standard deductions, but the segregated cost accounting used by some sponsors enables total sheltering of income when you report it on your IRS Form 1040 Schedule E http://www.irs.gov/pub/irs-pdf/f1040se.pdf.

For an example of the difference in income between paying taxes vs. exchanging into a TIC property that employs segregated cost accounting, consider this $1M exchange example:

NO 1031 EXCHANGE = $27,625 before income taxes

$1M sale proceeds – 15% (Federal capital gains tax, 2008) = $850K

$850K x 3.25% (5 yr. CD) = $27,625 before income taxes

EXCHANGE INTO A TIC UNSING SEGREGATED COST ACCOUNTING = $80,000

$1M sale proceeds x 8% = $80,000 and no income taxes

$80,000 vs. $27,625 -- That's a huge difference and too much to give away needlessly.  And again, it’s too much to give away every year for the rest of your life and your children’s and grandchildren’s lives.

THE BENEFITS OF SEGREGATED COST ACCOUNTING

Segregated cost accounting is a standard practice accepted by the IRS and is used by institutional real estate investors such as REITS, pension funds and other real estate investment companies.  It segregates all 5 and 7 year property from the improvements in total, and details accelerated depreciation schedules 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 and fixtures; parking lot components such as asphalt, slurry coatings, paint and covered parking structures; landscaping, hardscaping, perimeter fencing, walls, gates and more.  Most independent investors do not use segregated cost accounting, and some sponsors do not provide the reports.  But TIC owners that own properties that utilize segregated cost accounting will likely pay no taxes on the income derived from those properties.

TIC PROPERTY HIGHLIGHTS

+ Tenants-in-common properties are the fastest-growing sector of commercial properties

+ Tenants-in-common property purchases went from $1 billion in 2003 to $20 billion in 2007 because they are the ideal solution for most investors

+ TIC properties enable you, the co-owner, to own institutional grade, investment class assets for just your exchange equity.  And owning a tenants-in-common property is simple and easy with professional property management, asset management oversight and automatic electronic monthly deposits.

I trust this helps clarify the very important differences between using a TIC for your 1031 and exchange and paying taxes.  Feel free to contact me for further details or questions.