DEAR BOB: What is your opinion of TIC (tenancy-in-common) investments? Are they a good deal? I currently own a rental property worth about $1 million, with $800,000 in equity. My current net cash flow is about $11,000 per month. From what I have learned, a TIC “promises” increased cash flow and equity in grade A buildings. Do you recommend TICs or an independent Internal Revenue Code 1031 tax-deferred exchange into a larger building to increase my cash flow? –John D.
DEAR JOHN: If you make an Internal Revenue Code 1031 tax-deferred exchange into a TIC (tenancy-in-common) share of a large income property, such as an office building or a shopping center, you are at the mercy of the TIC syndicator and property manager who may be very good or very bad.
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Check on the success record of the TIC company. Many have been in business only a few years without much of a track record. Also check on the quality of the commercial property tenants.
For example, I know TIC investors who are very happy with their TIC investments in several Applebee’s restaurant buildings where they have been receiving monthly checks for more than 10 years. But I also know a TIC investor in another restaurant chain’s building where the tenant filed Chapter 11 bankruptcy and canceled the lease on the now-vacant restaurant building.
Of course, you can instead make an IRC 1031 tax-deferred exchange into a larger income property with better cash flow. Then you get to manage and control the entire property, although I can’t say which is your better alternative.
WILL THIS HOME SELLER FORFEIT $250,000 TAX-FREE SALES PROFIT?
DEAR BOB: We plan to sell our home in a few years. Then we will buy into a continuing-care retirement community, which requires a $125,000 founder’s fee. Will we be taxed on our home-sale profit because we are not buying another home? –Marion B.
DEAR MARION: No. Whether or not you purchase a replacement principal residence has nothing to do with your Internal Revenue Code 121 home-sale tax-exemption eligibility.
To qualify for the exemption up to $250,000 (up to $500,000 for a married couple when both spouses meet the occupancy test), you must own and occupy your principal residence at least 24 of the last 60 months before its sale. Full details are available from your tax adviser.
TAX CONSEQUENCES OF RENTING A ROOM IN YOUR HOME
DEAR BOB: Does renting a room in my home turn my principal residence into rental property and cancel the $250,000 tax exemption when I decide to sell? –Shana N.
DEAR SHANA: No. Renting a room in your principal residence only affects the rental portion, which becomes ineligible for the IRC 121 tax exemption up to $250,000 (up to $500,000 for a qualified married couple).
However, at the time of home sale, any depreciation you deducted for the rental room is “recaptured” and taxed at the special 25 percent federal tax rate. Please consult your tax adviser for full details.
The new Robert Bruss special report, “Pros and Cons of Investing in Rental Houses and Condominiums,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.
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