Management burden or rising operating expenses can upset any investor. When you lease a rental property to a tenant, you are required to pay operating expenses from your monthly income. Depending upon the property size, year of built, wear and tear, etc., the operating costs can take away a significant portion of your income. To deal with the growing burden of property management, you can do a 1031 exchange on your current property and swap it with a triple net (NNN) or TIC property.
A NNN lease eliminates landlord responsibilities in the first place.
A triple-net (NNN) lease is a single-tenant lease agreement under which the tenant pays all operating expenses associated with the property instead of the landlord or property owner. Different from a standard or gross lease, where the landlord only receives a flat rent and then pays operating expenses from the income, a NNN lease shifts the burden to the tenant’s shoulders. It’s an excellent opportunity for you if you want to save those extra dollars that you’re spending on managing your property. NNN Properties are available across the country.
TIC is a shared-ownership investment option that also divides the burden of property management among more than two investors.
TIC is a special type of agreement under which two or more investors own a single property. TIC provides undivided ownership of the property to its investors. It is an investment strategy under which two or more persons have an undivided interest in the asset. In a TIC, ownership shares are not required to be equal, and the title of the property can be inherited. The investment gets qualified under the like-kind rules of the 1031 exchange. This type of investment can be made for real estate like apartment houses, shopping complexes, office buildings, etc. TIC is almost similar to DST, but one of the common differences is that TIC has the number of investors limited to 35, whereas DST doesn’t have any limitations.
Every Co-owner of the property receives an individual deed, which means you receive the rights and benefits akin to a personal real estate investment. In this kind of arrangement, the first and most crucial step is the involvement of real estate companies. These real estate companies play a vital role in closing the exchange. Many real estate firms can help you in obtaining shares in TIC properties. These firms have a team of TIC investment professionals.
TIC investment is hugely popular among investors, especially among1031 exchangers, because of the flexibility in its structure, ease in purchasing TIC properties, and low investment opportunities for those looking for diversification.
The benefits of TIC investment aren’t limited to this only. Upon exchanging a TIC property for another, investors can defer capital gains taxes on the exchange. Before proceeding for exchange, the real estate investors must be aware of what 1031 exchange is? It’s an exchange that allows investors to reinvest the proceeds of the relinquished property on the replacement property. One of the essential points that investors must keep in mind is that only income-producing assets can be exchanged using 1031 exchanges. You can defer up to 100% capital gains tax when you do a 1031 exchange.
A TIC investment offers ownership in a real estate where two or more investors share an undivided, fractional interest in the asset. The shares of each investor in a TIC are not required to be equal, and ownership interests can also be inherited. Under a TIC arrangement, each co-owner receives a single deed at the time of closing for their undivided percentage of interest in the entire property. A TIC investor exercises the same rights and benefits as any sole owner of a property without the burden of managing the property. Investors can privately arrange a TIC investment, or it could be a syndicated TIC arrangement where a uniform set of rules apply to all investors. Most of the syndicated TICs are viewed as securities under federal security law.
Why should you choose a TIC 1031 Exchange?
- TIC investment is for investors who want to own institutional-grade investment properties that are managed by professionals, like office buildings, shopping complexes, corporate headquarters, and apartment buildings. TIC ownership can’t be compared with REITs as the latter does not qualify for a 1031 exchange.
- If you are tired of landlord duties and no longer want to bear the pain but want to keep your investment running, TIC investment is for you. Using a 1031 exchange, you can defer the capital gain taxes on your relinquished property and reinvest the entire proceeds in a TIC property.
Is a TIC 1031 Exchange investment suitable for you?
Of course, it is. If you are selling your investment property and don’t want to have management responsibilities on your new property, there is no reason why you shouldn’t invest in TICs. Post your investment in a TIC property; you will start receiving your share of income on a regular basis.
1031 exchange only allows swapping like-kind properties. A ‘Like-kind’ property means two or more properties of the same type. During the exchange, an investor does not receive any kind cash, but he can reinvest the proceeds of the relinquished property on the replacement property. On selling your old property, you must deposit the proceeds into a third party account, known as an escrow.
An important tip for investors, opting for a 1031 exchange.
Revenue Procedure 2000-37 has the guidelines for this type of investment. Any investment not conforming to these guidelines will be taxed typically, which means a big ‘No’ to the possibility of a 1031 exchange.
This kind of investment must be vigilantly scrutinized for potential financial risks. You may require the assistance of your advisor or a 1031 expert. These investments are illiquid, and investors can’t interfere in the management of the investment.