Is the warm weather bringing out more TICs?

Unlike the little pests that bother our pets, these TICs can be helpful options for real estate investors.

“I think the popularity has been the run-up in real estate prices around the country,” said Tom Oldfield, a tax-deferred-exchange specialist in Tacoma, Wash. “Sellers wanted to get out of one property and exchange into another, but they found replacement property was far more expensive than what they could afford.”

The answer for many taxpayers has been the TIC, or tenancy-in-common, transaction. This strategy allows investors who sell an investment property to buy ownership interests in another property (or properties) instead of buying an entire “like-kind” property to qualify for an exchange and defer capital gains taxes on the sale.

While TICs have been around for years and have been structured by a number of savvy property exchange specialists, they were officially blessed in 2002 when the Internal Revenue Service issued a set of 15 guidelines laying out the ground rules for successful TIC deals. Interest increased immediately, especially from investors who had no easy way of locating other investors who wanted — or could only afford — a piece of another property.

Here’s how TICs usually work: A “sponsor” such as real estate investor or broker will identify and arrange to purchase an apartment building, shopping center or office building. The sponsor will then make available a TIC purchase opportunity to other investors through friends and other brokers. These potential buyers can either buy a TIC interest outright or transfer the proceeds of a previous property sale in order to qualify as an exchange, which allows them to defer capital gains.

TICs have become popular and some big-name sponsors have entered the niche. This activity offers investors diversification of location and property type.

“Investors need to properly research any TIC offering and understand what they are accepting,” Oldfield said. “They need to know how the property is going to be managed, and if the costs include a commission, which is typically paid by the seller, not the buyer.”

Oldfield said that many TIC commercial buildings often are leased to one master tenant who is associated with the TIC sponsor. The master tenant then subleases the building and stands to profit the most when rental rates rise. TIC participants are guaranteed a rate of return but typically none of the additional windfall rents.

A tax-deferred exchange (commonly known as IRS Section 1031 Exchange) is really an arms-length sale and purchase. The transaction will proceed just as a sale for you, your real estate agent and parties associated with the deal. However, provided you closely follow the exchange rules, the IRS will “sanction” the transaction and allow you to characterize it as an exchange rather than as a sale. Thus, you are permitted to defer paying the capital gain tax.

An exchange occurs when you trade real property that is other than your home or second residence for other “like kind” real property that you have held for trade, business or investment purposes. The like-kind definition is very broad. You can dispose of and acquire any interest in real property other than a home or a second residence. For example, you can trade raw land for income property, a rental house for a multiplex, or a rental house for a retail property.

Section 1031 specifically requires that an exchange take place. That means that one property must be exchanged for another property, rather than sold for cash. The exchange is what distinguishes a Section 1031 tax-deferred transaction from a sale and purchase. The exchange is created by using an intermediary (or exchange facilitator) and by providing the required exchange documentation.

By pooling the proceeds of investors, TICs combine the tax and estate-planning benefits available to investors through 1031 exchanges with the potential advantages of owning a share of an institutional-quality investment property. Investors receive their monthly distributions (after expenses) while giving up the maintenance and administration chores associated with managing property.

That task sometimes includes chasing down tenants who have tick-infested pets in the heat of summer. Didn’t that rental contract stipulate no pets?

To get even more valuable advice from Tom, visit his Second Home Center.

Show Comments Hide Comments


Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Thank you for subscribing to Morning Headlines.
Back to top
Only 3 days left to register for Inman Connect Las Vegas before prices go up! Don't miss the premier event for real estate pros.Register Now ×
Limited Time Offer: Get 1 year of Inman Select for $199SUBSCRIBE×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription