1031
Exchange And Tenancy-In-Common:
Seeking The Right Advisor To Achieve TIC Investment Objectives
By: Cary Losson
A long-established section in the federal tax code, section 1031,
allows real estate investors to sell property that has been held for
investment purposes and defer capital gains and depreciation recapture taxes
if they acquire "like-kind" exchange property of equal or greater value and
reinvest all of their equity. Since the mid-1990s, many investors have
experienced the benefit of reinvesting their equity into investment property
interests structured as Tenancy-in-Common (TIC). TIC owners hold an
undivided fractional ownership interest in investment property evidenced by
a deed of trust.
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TIC, also known as Co-ownership of Real Estate (CORE), enables an investor
to participate in the ownership of institutional-grade, professionally
managed investment properties. The investor's equity can be diversified
amongst several different properties, geographic markets and real estate
companies, potentially increasing both the value and safety of the real
estate investment. TIC/CORE investments are designed to offer preservation
of capital, predictable cash flow and long-term appreciation in
institutional-quality investment property assets that benefit from greater
economies of scale.
With its features and benefits, TIC/CORE is an increasingly popular 1031
exchange option for many real estate investors. However, 1031 exchanges and
TIC/CORE transactions are very complicated, with both tax and legal issues
topping the list of potential pitfalls. It is therefore essential that
investors be knowledgeable about what to look for in a quality advisor.
Financial advisors are required by securities law to be properly licensed in
order to consult clients regarding TIC/CORE transactions and other
investment interests in real estate. Financial advisors should hold both
Series 7 and Series 63 securities licenses to qualify them as knowledgeable,
well-rounded consultants in the investment process. It is essential that
they have experience in the commercial real estate business, in addition to
an understanding of personal investment objectives and client suitability
issues.
But perhaps the most important component to look for in a TIC financial
advisor is their intimate, trusted and deeply rooted relationships with key
real estate companies. This attribute is critical to their ability to
provide the best opportunities for their clients. There are almost 80 real
estate companies across the United
States that are either already involved or considering involvement in the
TIC/CORE industry as a real estate provider. As with any industry, these 80
companies represent varying degrees of acumen, experience and quality. To
achieve the greatest potential for a client, a financial advisor should have
consistent access to the top ten percent of these companies in order to
provide their client access to the best properties available. Obviously, a
new financial advisor with little or no experience or industry knowledge may
not have access to the top real estate providers, as these providers prefer
to work with experienced consultants that specialize in this unique segment
of the market.
Investors should also be aware of how their financial advisor stacks up,
looking for a history of successfully completed transactions. A long and
proven track record indicates that a financial advisor is an experienced
professional. An investor wants such an advisor in their corner asking all
the right questions, making appropriate and suitable recommendations,
understanding the nuances of successfully completing TIC/CORE transactions
and providing answers to any and all tax and legal questions.
When considering a 1031 exchange or TIC/CORE investment, investors should
ask the following specific questions of the financial advisor:
* What percentage of your business is 1031 exchange and/or TIC/CORE related?
* How many investors have you consulted that invested in TIC/CORE structured
properties this year? How many last year?
* How long have 1031 exchanges and TIC/CORE been a focus of your investment
recommendations?
* Do you have the appropriate licenses to complete this transaction (Series
7, Series 63 securities licenses)?
* With which real estate providers do you work most closely?
As customer demand continues to drive this segment of the real estate
market, the emphasis on quality - quality consulting, quality property, and
quality transactions - will be increasingly important. Part of the
qualitative process is ensuring that financial advisors representing a
client make appropriate recommendations for that client based on the
client's best interest and not based on any "bias." A final issue that needs
to be addressed is that it is not unusual for "referral" compensation to be
paid between referring parties. This practice is illegal and a complete
breach of ethics,. Therefore, if any form of compensation changes hands -
disclosed or undisclosed - between financial advisors and Qualified
Intermediaries, real estate companies or other unlicensed individuals
derived from an exchange transaction, a felony may have occurred.
In short, investors should take the time to identify a reputable advisor who
not only can provide acceptable answers to the above questions, but who will
also have the relationships necessary to guide their clients into the
appropriate investment. It is important to remember, firms or individuals
involved in recommending, offering or selling 1031 TIC/CORE investments must
be licensed with a broker-dealer, the SEC, the NASD and the state securities
regulators in every state in which the firm or individual operates and in
which the client resides. Any "unlicensed" firm or individual involved in
recommending, offering or selling these investments is in direct violation
of federal and state securities laws.
Co-ownership is the fastest growing option for 1031 exchange investors
seeking suitable replacement property. Properly structured and presented,
such investments can also generate new listing opportunities for real estate
agents while satisfying both the IRS "like-kind" investment property
requirements and the SEC and NASD securities regulations. The advantages of
co-ownership of institutional-grade real estate are clear and compelling.
When exploring co-ownership, smart investors need to seek out industry
experts to guide them through the replacement property process. It is indeed
the wise investor who is aware of his or her long-term goals that seeks
experienced guidance to chart their course, thereby turning TIC/CORE
investment opportunities into realities.
(c) 2005, 1031 Exchange Options.
About the Author:
Cary Losson is the Founder and President of 1031 Exchange Options. A
luminary in the TIC/CORE 1031 exchange marketplace, Mr. Losson is frequently
quoted in journals and periodicals concerned with investment property issues
and advice. For more resources to assist in your learning:
http://www.1031exchangeoptions.com
Section 1031 does not apply
to exchanges of inventory, stocks, bonds, notes, other securities or
evidence of indebtedness, or certain other assets.
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