We recently helped one of our investors invest their 1031 exchange proceeds into one of our BTR deals through a Tenant in Common (TIC) structure.
In the world of real estate investing, one strategy that often goes under the radar is the 1031 exchange. It’s a powerful tool that allows investors to defer capital gains tax when selling a property by reinvesting the proceeds into another like-kind property. However, to take full advantage of this tax-saving strategy, savvy investors are exploring innovative approaches like Tenant in Common (TIC) structures. In this blog post, we’ll dive into how a recent success story demonstrates the potential of TIC structures to unlock the benefits of 1031 exchanges for both investors and operators.
The 1031 Exchange and TIC Structure
A 1031 exchange, named after Section 1031 of the Internal Revenue Code, is a tax-deferral strategy that allows real estate investors to sell a property and reinvest the proceeds in a similar property, thus postponing the payment of capital gains tax. However, to qualify for a 1031 exchange, investors must meet certain criteria, including the requirement that the new property must be held for investment or productive use in a trade or business. This is where the Tenant in Common (TIC) structure comes into play.
TIC structures allow multiple investors to co-own a property. In the context of a 1031 exchange, a TIC structure enables the investor to take direct title to the property, fulfilling a crucial requirement of the exchange. This approach allows investors to pool resources and invest in larger and potentially more lucrative real estate deals.
A Win-Win for All Parties
Implementing a TIC structure in a 1031 exchange can be a complex transaction, but when executed correctly and with lender cooperation, it can be a win-win for all parties involved. Here’s how it works:
Benefits for Investors: In the recent success story, an investor leveraged the TIC structure to achieve two significant advantages. First, they were able to capitalize on the benefits associated with a 1031 exchange, deferring their capital gains tax liability. Second, they invested the proceeds in an asset with exceptional year 1 bonus depreciation through a cost segregation study. This strategic move significantly reduced their overall tax burden from the initial 1031 exchange transaction. Additionally, the investor will enjoy cash flow from the TIC deal, making it an even more attractive investment.
Benefits for Operators: Operators seeking to pursue a TIC structure in real estate transactions can benefit from the increased capital influx provided by multiple TIC investors. This can lead to more significant and ambitious real estate projects that might not have been feasible otherwise. Operators can also diversify their portfolio and mitigate risk by partnering with multiple investors who bring their capital and expertise to the table.
Key Partnerships
It’s worth noting that successfully navigating a TIC structure in a 1031 exchange requires expertise and legal guidance. Partnerships with law firms like Moorhead Law Group and Hightower Law Group played a crucial role in making the recent success story possible. Legal expertise is essential to ensure that the TIC structure complies with all regulations and maximizes the benefits for investors and operators alike.
