The IRS position on Code Section 1031 states: "Generally, when you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031"

Current tax laws require that those choosing the 1031 exchange must select a replacement asset within 45 days and close the transaction within 180 days.

For many investors locating and negotiating the purchase of a suitable property, in less than two months, 45 days to be exact, creates an intolerable level of stress.

It's this issue of timing which makes Tenants-In-Common (AKA TICs) an popular alternative to the 1031 Like-Kind-Exchange.

The Tenants-In-Common (TIC) program offers fractional ownership of commercial real estate by allowing as many as 35 investors, per transaction, to own a portion of a property, opening the door to commercial real estate for investors, who would otherwise be financially unable to participate.

"A lot of investors who are doing a 1031 exchange love the TICs because they are pre-packaged. Essentially an investor could study the available property and could be invested within a matter of weeks," says Kathy Heshelow author of Effortless Cash Flow: The ABC's of TICs (iUniverse, 2006).

Heshelow adds that it is a big time-saver and a concept that is growing in popularity. In 2002, the Internal Revenue Service clarified the status of TICs as real estate and not partnerships; that ruling also made TICs qualify for Section 1031 exchanges. Today, billions of dollars are being poured into these types of investments. And while most TICs are sold as securities by licensed securities brokers, some are sold through private real estate companies as real estate transactions. There is even a Multiple Listing Service for TIC properties. It advertises that http://www.ticmls.com/ is the only national MLS for the TIC industry.

There are several factors that lure investors to a TIC property such as: seeking a higher quality property, no longer wanting to manage the property, wanting to establish monthly cash flow, wanting to diversify a financial portfolio and invest in real estate outside of a geographical area. It's often referred to as a passive investment because you no longer have to have your sweat-equity involved as with owning and actively managing something such as a duplex. TICs take the management work out of the equation and typically provide an average annual return on an investment of about 6-8 percent.

"It's passive; there's no management -- there's no day-to-day involvement," says Heshelow.

Still another benefit that attracts savvy investors is the concept of using IRA or 401k money to buy a TIC property. Heshelow says it works sometimes. "Many of the TIC properties have an LLC component which is an all-cash component and that is able to take IRA or 401k monies, but not every offering has that possibility."

But Heshelow cautions TICs are not for everyone. First of all you have to have a net worth of about one million dollars to buy most TICs. Secondly once you're in a TIC, it's not always easy to get out. The secondary market for reselling TICs is not well established. Many think that it is coming as the TIC industry, now in its infancy, eventually grows up. Heshelow adds a few more reasons to avoid them, such as if you are only interested in a short-term investment. Most TICs are held for about five to seven years. Heshelow says you should never invest in a TIC if you are putting all your money into it and then depending on the monthly cash flow. TICs, like all real estate, are not liquid -- getting your money out can take lots of time. She also adds that you should not consider investing in a TIC unless you have at least $100,000 in equity to invest.

The Tenants-In-Common program appears to be an excellent alternative to the 1031 Exchange. As with any real estate investment and tax planning strategy, we strongly recommend research, education and the involvement of the appropriate professionals before actually pulling the trigger.

Please contact us or visit PinehurstHomeTeam.com for additional information on this and other real estate related matters. 

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With our highest regard,

Wayne and Lynda Gomillion
"The Pinehurst Home Team"

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