Tenants in Common 1031 Exchanges Offer Investment Diversity but Beware

Looking for a different type of real estate investment? Tenants in common ownership offers benefits for investors who are tired of property management and want to use leverage by buying a fractional interest of a much larger investment vehicle.

However, as some Sacramento real estate investors have discovered, it pays to investigate the company before handing over cash to buy into a tenants in common project. Not only is checking out the company essential, but finding out whether the investment is registered as a security might save you scrutiny by the SEC.

One such company, Sacramento-based Heaven Investments Holding Corp., filed for bankruptcy in August, listing assets of $21.6 million and liabilities of $30.6 million, and it's presently being investigated by regulators.

The experts say if you're going to participate in a tenants in common 1031 exchange, make sure you're dealing with a registered representative who has a Series 7 (or Series 22) and Series 63 (or Series 66) license because such transactions, although real estate, are actually securities.

The way a tenants in common 1031 exchange works is instead of trading property A for property B, investors can exchange their equity by buying a fractional interest of a much larger, perhaps commercial, project. These investments are typically offered through a private placement memorandum. Investors are advised to select a company with a proven track record and work with a tenants in common specialist who has performed due diligence.

Some of the advantages of a Tenants in Common 1031 Exchange are:

• Preservation of wealth
• Diversification
• Deferred taxes
• Relief from property management
• Cash flow possibilities
  
• Potential appreciation

Read more about Tenants in Common 1031 Exchanges.

The Short Sale, by Elizabeth Weintraub, coming from Archer Ellison in January 2009.

Photo: Big Stock Photo