Rental property owners that buy their real estate in a Land Trust will still be able to defer the payment of their capital gain taxes through a tax deferred exchange later when they dispose of their property.

The Land Trust does not circumvent any other taxes such as property taxes, estate taxes or gift taxes.  The Land Trust merely allows the property owner to buy property on a confidential basis, but will not get around any tax liabilities that would otherwise be due.

Article by: William Exeter

If you have any question about Tax Issues and the Land Trust. Contact us. Our 1031 exchange experts are here to help you.

Article by: William Exeter

The Deferred Sales Trust™ or DST™ might be an alternative income tax planning solution for those taxpayers who wish to sell highly appreciated assets and not acquire replacement property by structuring a 1031 tax-deferred exchange transaction.

The Housing Act contained a section that alters Section 121.  Currently, Section 121 allows property owners to sell property that was used as their home and subtract up to $250,000 in gains per homeowner ($500,000/married couple) from their income.  Section121 only applies to the property owner’s home and not to rental property.  Property owners must have lived in their home for 2 out of the last 5 years to qualify for the exclusion.

Recently, combining Sections 1031 and 121 became somewhat common as a income tax planning strategy.  It allowed property owners to convert their property from either their home to investment property of vice versa.

Changes to Section 121

However, the Housing Act amended Section 121 so that it no longer allows property owners to write off the exclusion on the sale of their home if the property was also used as rental property.

Non-qualified use (home used for vacation or investment) after the property was used as a home will not count against the property owner.  Only non-qualified use before the property is used as the home will count against the property owner.

The gain from the sale of the home is divided between qualified and non-qualified use.  The division is based upon the amount of time the property was held and used as qualified versus non-qualified use and then divided by the total number of years that the property was held by the property owner.

Gain belonging to the time that the property was used for non-qualified use will no longer qualified under Section 121 and will not be excluded from the property owner’s income. Gain belonging to the time that the property was used for qualified use (home) will still qualify under Section 121 and will be excluded from the property owner’s income.

Effective Date

These changes to Section 121 apply to the sale of property after 12/31/2008.

Transitional Period

 There are two problems that every real estate investor must one day face – How can I exit from all my real estate investments, pay no capital gains taxes and achieve maximum income for retirement?  And secondly, when I die, how do I pass along all the real estate equity and income to my heirs or beneficiaries who may have no interest in or experience with real estate investment?

TICS are the answer to both of these vexing problems – They provide the best way for real estate investors to transition from active, sole-owned property investment to less-active, jointly-owned property investment.  And TICS (tenants in common real estate) enable all investors to plan their ultimate exit strategy so that when they die, their heirs can benefit from maximum equity and income transfer and minimum taxes and other disruptions.

Since TICS can be used with IRS section 1031 tax deferred exchanges, the investor can sell any or all of his current properties and use the 1031 exchange to buy TICS and defer all capital gains taxes or depreciation recapture.  Once the investor owns the TIC property, they enjoy the many benefits, such as regular monthly income, no management hassles, total tax sheltering of their income when segregated cost accounting is used and maximum upside profit potential.

After the investor has enjoyed the benefits of TIC property ownership for many years, they will eventually pass away.  With TICS, this is much easier than with sole-owned and self managed properties.  When the TIC investor passes away, their deeded property interest passes along to whomever they designate, typically children or grandchildren.  There is nothing these heirs or beneficiaries need to do except receive the monthly income.  They do not need any expertise in real estate to do this. 

This is in contrast to when an investor dies holding many individually owned and managed properties.  In such cases, families are thrown into a nightmare of property identifications, management issues, taxes, forced liquidations and much more.

There is no better way to exit self-owned and managed real estate for a better retirement and smoother transition of assets upon death than tenants in common properties.  This is why they have grown from one billion dollars of property purchased in 2003 to twenty billion dollars of property purchased in 2007. 

Article by: Ken Yamaguchi

Tics 1031 exchange. If you have any question about tics 1031 exchange or 1031 exchange experts are here to help you.

In addition to the different property types that are available as TICS, such as office, multifamily and retail, TIC properties also come in two different platforms or formats.

 The first type, called the real estate platform, is pure real estate property co-ownership.  This type is the essence of tenant in common co-ownership – deeded, fee simple, title insured and undivided co-ownership of investment real estate.  Buyers of these properties are not obligated to use any particular entity for property management or asset management.  The pure real estate TIC is typically sourced through a licensed real estate professional or REALTOR®.

The second type of TICS are those that are sold as securities.  These are largely the same as the first type, but they are sold only through licensed securities dealers and their Registered Investment Advisors (RIA) or Registered Representatives (Reg. Reps).  Most of the TIC industry offers their properties in this format.  In 2009, it is anticipated that these will be able to be sourced through REALTORS® also.

TICS that are sold as securities, also referred to as securitized TICS, are not more secure or safer than pure real estate TICS – that is a common misconception.  They come with essentially no more due diligence than real estate TICS, nor are the properties held to a higher standard than pure real estate TICS.  Securities broker-dealers who sell these properties perform a diligent review of the properties prior to making them available, but this review is no different than what a very experienced and expert real estate investor would do.

Why would one TIC be sold as a security and another sold as real estate?  The main reason has to do with the Securities and Exchange Commission (SEC) rules.  The rule governing TICS are at this link, then scroll down to section H:http://www.sec.gov/divisions/marketreg/bdguide.htm

“H. Real Estate Securities and Real Estate Brokers/Agents

The offer of real estate as such, without any collateral arrangements with the seller or others, does not involve the offer of a security. When the real estate is offered in conjunction with certain services, however, it may constitute an investment contract, and thus, a security.”

In plain language, TICS are regarded as a securities investment if the sponsor or an affiliate of the sponsor also manages the property, or provides asset management, or if the sponsor or its affiliates holds a master lease via a contractual agreement that is in place when the TIC property is purchased by the investor.

The reason that TICS are classified as securities when the sponsor or an affiliate of the sponsor performs these functions goes to a landmark tenants in common US Supreme Court case called SEC vs. Howey, 1946.  A good summary can be found at this link:http://en.wikipedia.org/wiki/SEC_v._W.J._Howey_Co.

In short, the court found that “an instrument qualifies as an “investment contract” for the purposes of the 1933 Securities Act which later came to be referred to as the Howey test if

•  investment of money due to an expectation of profits arising from
•  a common enterprise
•  which depends solely on the efforts of a promoter or third party

Today, modern TICS are considered securities because under the “Howey Test” when the TICS are property-managed or asset-managed by the sponsor, then they qualify as an investment contract (a security) because the sponsor is now largely responsible for the success of the enterprise.  The sponsor’s influence upon the success of the property is now greater than a simple pro-rata proportional ownership interest.

As the property or asset manager or both, the sponsor now has the ability and responsibility to ensure the property’s success.  This is in contrast to the pure real estate TIC, where the sponsor is a co-owner along with everyone else, and simply votes on the crucial issues affecting a property according to their pro rata ownership interest.

As can be seen, the determination of a real estate TIC vs. a securitized TIC is a matter of definition, not of quality.  It is based on the degree of involvement of the sponsor with the property after the close of escrow.

TICS as securities are as good as real estate platform TICS since the sponsor or its affiliated property or asset management entities may in fact be the best-qualified to manage or provide oversight and auditing for the TIC property.  This is because most TIC sponsors are experienced real estate investment companies, with expertise in every phase of real estate investment including but not limited to acquisition, management and disposition.

Regardless of whether a TIC is securitized or real estate, as always, the most important thing for the prospective investor to do is to compare the properties under consideration using tried and true traditional measures used in investment real estate.

Is the property conservatively underwritten?  Are the assumptions reasonable?  Should the property perform to pro forma calculations?  Is the net cash-on-cash return reasonable, attainable and competitive in today’s marketplace?  Are the fees reasonable?  If the answers to these questions are all yes, then it’ simply a matter of choosing which type of property and location that the investor finds most appealing.

Some investors prefer retail, others want to own multifamily residential, others want conventional office properties.  Each type has its own pros and cons.

To read a review of the various types, see the article at this site entitled Tenants-in-Common Property Comparisons at this link:

http://1031taxexchange.org/tenants-in-common-properties-overview/

I trust this has been helpful.  Feel free to contact me with questions.  Thank you.

Once an investor has determined that they like the tenants in common property structure, they do their due diligence on the available properties.  In today’s market and economic cycle, this is more important than ever.

Risks that seemed acceptable upon first glance might involve a little more detective work today.

For instance, let us say that you are looking at a multi-family property that serves a dominant regional employer.  For many years, occupancy rates have remained steady at your property and the comparables in the area.   And let us say that more than 60% of your tenants are employed there.

What are the business conditions that affect that major employer?  Are they growing, flat or declining?  Is that site expanding, profitable, or slated for closure?

Today an investor’s due diligence goes beyond simply looking at average rents, rent growth and occupancy rates, but they must look more closely at the tenant mix and their employers, and try to decide if there is a greater risk to occupancy than first appears.

And the same thing goes for conventional office properties.  How are these tenants doing?  How is the industry that they are in?  How do your tenants compare to others in their industry?

The same thing goes for retail properties.  Are their sales growing, flat or declining?  How do your tenants’ compare with other stores in the same chain? Is your retail center in a growing or flat or declining market, compared to other centers?

Today investors must expand their focus to include the broader economic factors that may pose risks to their properties.  Good sponsors and representing brokers are fully aware of these factors and should be consulted on these issues.

Article by: Ken Yamaguchi

Tics and due Diligence – 1031 Tax Exchange.  If you have more question about Tics and Due diligence our expert are here to help you.

Tenants in common properties enable real estate investors to own much higher quality properties than they could own and manage on their own. 

TICS are groups of like-minded individuals, both accredited and sophisticated, who join together as tenants in common, to own and manage very large, institutional-sized investment properties.

For example, instead of owning 100% of a rental house or condominium, a TIC investor owns an undivided percentage interest in a much larger property.  This must not be confused with vacation timeshares or vacation fractional ownership, which are entirely different – that is ownership of a fractional time-interest.

TIC ownership is a fee simple, deeded and undivided ownership interest in the whole property.  TIC entities earn their exact percentage share of income and tax advantages just as they would on their own property. 

But the difference is that, together with others, they own a much larger, more valuable, more stable and better quality asset. 

Another important difference is that they do not have to manage the day to day operations of the property.  They do not have to handle leases, collections, taxes, insurance, maintenance or capital improvements.  TIC properties are of such large size and quality (class A, $20 million and greater in value) that they require professional leasing, management and asset management for auditing and oversight.  All of these functions are carried out by experienced professionals, chosen for their expertise and cost-effectiveness. The TIC owners have the power, anytime, to hire and fire these professionals as they see fit.

Still another benefit is that the net cash-on-cash return to the individual owners, investors, TICS, are usually better than the investor would earn on a lower class, smaller asset that they might otherwise own as a sole-owner.  Also, in many cases, the tax advantages are such that no taxes are due on the income derived from the property, since many properties use segregated cost accounting for the maximum allowable deductions for depreciation and expenses.

Yet another important benefit is that each TIC does not have to come up with their own financing since this is already pre-arranged by the sponsor.  Each TIC only needs to verify that they are sophisticated and accredited – that they have an accountant, an attorney, and that their total net worth is $1.5 million or higher, inclusive of real properties, bank balances and time deposits, retirement accounts, cash value of life insurance policies and personal property.

TICS give the benefit of size, stability and potential growth in equity, all while reducing the hassles of ownership to the bare minimum.  TICS enable the investor to get favorable financing at a time when it is very hard for individuals to do so.  At the same time, TICS maximize the net after tax income to the TIC co-owner.

Article by: Ken Yamaguchi

This is a good time to research tenants in common properties, sponsors and the industry as a whole for the time when your next exchange comes up.

The hallmarks of TICS are just as valid today as they were in 2005 — The largest, highest quality, safest and most stable real estate assets always do better in up markets and down.  This is especially true for multifamily and the best retail.

There have been glitches amongst the sponsors who focused on master lease structures (discussed in a separate article at this site).  And some retail properties that had tenants that went dark have underperformed their pro-forma calculations (centers with Linens & Things and Circuit City as tenants). 

But there is no question that class A, investment grade (($20M+ in total acquisition price) remain the safest, most stable sources of income and potential gain upon final disposition.

This is a wise time to carefully research tenants-in-common.  The market will turn up and when it does you will want to have done your complete due diligence in a relaxed manner. It is much better to research now rather than later – when you are feeling rushed when your property is under contract and you have only 45 days to identify your exchange up-leg after the close of escrow.

Tenants in common property ownership is not for everyone (as discussed in another article at this site).  But they remain the best way to step up in class and size, in safety and stability, for the best income (often fully tax sheltered) and upside profit potential.

Article by: Ken Yamaguchi