TIC: Is It Right for You?

If you are a small investor seeking to do a 1031 exchange, you face limited choices and serious competition from other buyers if you want to defer your capital gains when you sell a piece of property. How to solve this dilemma? The answer may be in a new investment opportunity that is sweeping the country: TIC investments.

Tenants in common (TIC) investments allow investors who sell an investment property to buy ownership interest in a property or multiple properties instead of buying one entire piece of property. A TIC allows the investor to qualify for a 1031 exchange and defer capital gains taxes on the sale. With this kind of investment, a seller needing to complete a 1031 exchange can buy into quality institutional investment property, from large regional malls to trophy office buildings to chain retail stores.

Advantages to the investor include elimination of property management headaches, monthly distribution checks with a guaranteed return over an extended period of time depending on the investment, and the ability to leverage the investment over different types of investment products.

A disadvantage is potentially high entry fees, including commissions accounting and attorney fees. Decision making on an investment must be unanimous. If a tenant or project fails or needs capital to cover an unexpected maintenance issue, the investors must fund the need.

Perhaps the biggest challenge is when the investor needs to sell the investment. Currently, there is no active secondary market for TIC investments. Most TIC facilators will make best efforts to find a replacement buyer, but there are no guarantees.

To figure out if this investment is for you, consider the following issues: What is my tax liability exposure if I do not complete a 1031 exchange? What will I do with my net proceeds if I do not perform an exchange? What risks do I have with that investment? What are the risks of entering into a single property exchange against the benefits or risks of a TIC investment? For some people, TIC investments offer the solution they are looking for to the 1031 dilemma.