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1031 TIC Bankruptcy
Kenneth R. Harney
The biggest financial fear about so-called "1031 TIC" real estate investment deals appears to be turning into reality: One of the largest "tenants in common" or "TIC" firms -- with 8,300 individual investors and office and retail properties valued at $2.4 billion -- has filed for Chapter 11 bankruptcy protection.
The firm, DBSI of Boise, Idaho, was part of an investment wave that followed a 2002 ruling by the IRS. That ruling said owners of commercial and residential income properties could fulfill the tax-deferral requirements of Section 1031 of the Internal Revenue Code by investing in tenants-in-common ventures.
Under Section 1031, investors who seek to avoid or defer capital gains taxes on their properties can exchange their interests for "like kind" real estate, provided they follow IRS guidelines.
In 2002, the IRS ruled that tenants-in-common arrangements -- under which as many as 35 investors own fractional interests in individual properties -- can qualify as vehicles for 1031 exchanges. For example, an owner of a small retail shopping strip might exchange into a TIC that owns a much bigger and more valuable downtown office building.
The tenants-in-common owners could thereby avoid immediate taxation of capital gains and end up ... more

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