Q: What is a “TIC” ?
A: Tenant-In-Common (TIC) ownership is the common name for what the IRS recognizes as “fractional
ownership,” or “co-ownership” and is simply a description of the relationship between multiple owners of a
single real estate property. Further explanation of tenant-in-common (TIC) structures, i.e., TIC's, co-ownership sales,
leveraging 1031 tax deferred exchanges and assessing a like-kind property in regards to an exchange, is available below or by
calling TREC at 702.851.9008.
Q: What is co-ownership of income property ?
A: Co-ownership refers to real estate owned by more than a single owner, where each owner
purchases an undivided, fractional interest in the asset. Each co-owner receives an individual deed at closing for
his or her undivided percentage interest in the entire property. TIC co-owners are not required to own equal interests
in the property and ownership interests can be sold or inherited according to tenant-in-common inheritance, survivorship and death
guidelines. The TIC co-ownership structure enables the average person the opportunity to own larger institutional-quality
commercial property, and to enjoy the benefits of professional property management.
Q: What are the benefits to co-ownership of income property ?
A: The individual TIC co-owners enjoy fractional share owenrship in an institutional-quality real estate asset that
provides them stable cash-on-cash returns and long-term appreciation potential without the concern of day-to-day property management issues.
Co-owners also benefit from the same tax and wealth preservation benefits of sole-owned real estate, resulting in a higher quality of
life and frequently greater realized income than they had been receiving from their previously owned properties.
Q: What additional liability is associated with co-ownership ?
A: Real estate, either single buyer or co-ownership properties, has many commonly identified risks
typically originating in the performance of the property, local/national market conditions, etc. The co-ownership
properties offered by TREC are offered with non-recourse mortgage loans already in place when sold to TIC investors from a
nationally prominent financial institution. Non-recourse commercial mortgage debt structures allow for the debt financing to
be assumed by future buyers, so at sale, the buyers of fractional ownership properties or single ownership properties remove
the current owners from any continued obligation to repay the loan.
Q: How large is the co-ownership industry?
A: In the years since the IRS issued guidelines that clarified how undivided fractional TIC real estate
qualifies as a like-kind real estate property replacement for 1031 Exchanges (Rev. Proc. 2002-22), the TIC co-ownership industry
has approximately doubled, year-over-year, with approximately $10 billion of investor equity invested in TIC properties annually.
Q: What is Revenue Procedure 2002-22?
A: Rev. Proc. 2002-22 is a set of guidelines from the IRS that outlines how fractional-deed
co-ownership can be structured to avoid being considered a partnership when completing 1031 tax deferred exchanges.
Q: What is a Qualified Intermediary?
A: A Qualified Intermediary (QI), also known as a 1031 exchange accommodator, is an independent party who facilitates
tax-deferred exchanges as required by and referenced in Section 1031 of the Internal Revenue Code (IRC).
The property seller signs an agreement instructing the 1031 exchange qualified intermediary to receive
real estate like-kind sale proceeds and then to hold those proceeds until a replacement property is identified. Once the sale proceeds are used to
purchase the replacement property, the 1031 exchange is completed. The property seller must never handle the actual proceeds
or the option to leverage a 1031 tax deferred exchange will be voided.
Q: Is foreign property considered to be like-kind property?
A: No. Only property located within the fifty (50) United States and the U.S. Virgin Islands is considered
like-kind property eligible for a 1031 tax deferred exchange.
Q: What is "like-kind" property?
A: All real property is 'like-kind' and can be exchanged for other real property. For example, vacant land can be
exchanged for an apartment building and a rental home can be exchanged for a commercial retail, office or medical real estate property.
Q: What is the 'downleg'?
A: The “downleg” represents the real estate property to be sold as part of the 1031 Exchange.
Q: What is the 'upleg'?
A: The “upleg” represents the property to be acquired to complete the 1031 Exchange.
Q: How do I take ownership in a TIC?
A: As a TIC owner, you have a fee simple ownership interest in the property where your name is on the
title and you own a deeded portion of the property. TIC property ownership entitles you to all of the benefits of owning real
estate such as your pro-rata share of income from the property, future appreciation and depreciation of the asset property as well as
most other tax related benefits of owning real property.
Q: What are my timeline requirements if I am executing a 1031 tax deferred exchange?
A: An investor executing a 1031 tax deferred exchange is allowed, under law, to identify a like-kind real property
replacement (the upleg) within 45 days of the date of sale of the downleg property . An exchanger has 180 days from the close of the
downleg property to complete the purchase of the upleg and this includes the 45 day period for identification. The identification period
terminates at midnight on the 45th calendar day following the downleg close date (Sundays and holidays included).
Q: Where do my 1031 exchange funds go when they leave Qualified Intermediary (accommodator)?
A: When 1031 funds are transferred from an accommodator (Qualified Intermediary) in anticipation of
purchasing interests in a real property, they are sent directly to escrow.
Q: Can my partnership, trust, or corporation execute a 1031 Exchange?
Yes, your partnership, trust or corporation can execute a 1031 exchange as long as real property is exchanged for
real property. However, the IRS Section 1031 does not consider partnership interests or stocks as like-kind real estate properties.
Q: What are the qualifications for participating in a TIC?
A: In order to participate in a TIC co-ownership structure, a qualified investor, with respect to natural persons
only, must satisfy one or both of the following criteria: (i) to reasonably expect to earn individual income in excess of $200,000
during the current year or joint income together with said person's spouse in excess of $300,000 for the past two (2) years; and/or (ii)
to have either individual net worth or joint net worth together with said person's spouse in excess of $1,000,000. With respect to
trusts, the trust must show assets of $5,000,000 or more.
Q: How many co-owners are involved in each property?
A: The IRS has stated that it will allow up to 35 co-owners to participate in any single TIC structured deal
and still satisfy the guidelines for 1031 tax deferred exchange qualification. TREC normally involves 10-20 co-owners per property
depending on the size of the property.
Q: What is a typical investment amount required for TIC ownership?
A: The Revenue Procedure 2002-22 issued by the IRS allows up to 35 TIC owners in any one property.
Because of this limitation, minimums vary depending on the size of the property and can range from $250,000 to multiple millions of
dollars. This allows the average investor, who would normally need significantly high investment dollars, to purchase an
institutional grade quality commercial asset with higher-grade tenants and significant cash-on-cash returns. Our TIC co-ownership
structure also provides an avenue for investors to diversify their holdings among different markets and asset types.
Q: What happens to my TIC ownership if I die?
A: Tenant-in-Common death, survivorship and inheritance regulations are treated like any other real
estate asset; your fractional share ownership will be inherited by your heirs pursuant to your will. The deferred income taxes
from your 1031 exchange will be forgiven forever and your heirs will be taxed on a stepped-up basis with the taxable value of the
asset reflecting fair-market value.
Q: Who manages the property in a TIC co-ownership structure?
A: A third-party property management company will handle the management and leasing responsibilities of the
TIC co-ownership property. The co-owners will maintain control in a number of significant ways, i.e., approving or disapproving of
all new leases, voting/hiring management if needed (property management contracts are renewable annually).
Q: Who will be the leasing agent and how is the leasing agent appointed?
A: The leasing agent is determined before a property closes or soon after the close. This is done through a
series of proposal submissions and interviews. The property management company will then cooperate with the leasing agent in the
acquisition of new or renewed leased commercial property, all of which is subject to co-owner approval.
Q: What is a ‘cash call’ and what happens if there is one?
A: A cash call results when property income is less than the property mortgage loan. This could
be caused by tenants defaulting on their rents, unanticipated expenses, etc. A capital call could occur and funds would be required
by the co-owners to cover the note until the property income met that requirement again. Along with close attention to the
financial situation of the property, sufficient reserves should be set aside for each property to avoid such an occurrence.
TREC has never had a cash call on any property it has offered for sale.
Q: What is the exit strategy to co-ownership of a commercial real estate income property?
A: Each co-owner is a deeded owner on title allowing them to sell their interests to other buyers at
fair market value. A co-owner who decides to sell must first notify the tenant-in-common sponsor who has a right of first refusal in
purchasing the interest. The tenant-in-common sponsor or other co-owners may or may not choose to purchase the available interest
in the property, after which, if they refuse, the selling co-owner is free to sell to a third party subject to the lender's approval.
Q: What happens if a co-owner files for bankruptcy, dies, or divorces?
A: In a TREC-sponsored commercial co-ownership property, each co-owner holds title within a newly formed,
single-member LLC, commonly referred to as a Special Purpose Entity (SPE) that is normally joint and several. Therefore,
the property should not be affected. The SPE, approved by the IRS in completing a 1031 exchange, ultimately protects the lender and
each of the co-owners.
Q: Can I exchange my co-ownership interest into a new property?
A: Yes, co-owners of TREC properties can exchange out of as well as into a co-ownership property.
Co-ownership of real property as tenant-in-common will qualify as a like-kind downleg in a 1031 exchange providing that all
IRS Section 1031 exchange regulations are followed.
