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FAQ-TIC §1031 Exchange
Frequently Asked Questions
What is TIC
ownership utilizing 1031 FEC TIC procedure?
Tenants-In-Common (TIC) deed ownership with 1031 FEC
assistance can provide the real estate buyer with the advantages of
ownership in a larger property, cash flow and annual depreciation benefits
without many of the day-to-day management problems associated with
individually-owned rental property.
1031 FEC assist real estate sellers and buyers with non-TIC 1031 exchange
Yes. Farms, Ranches,
Recreation, other Income property, and Land Bank (speculative development
land) can be exchanged for a single deed with 1031 FEC
investment amounts are ordinarily required for TIC ownership?
Revenue Procedure 2002-22 issued by the IRS allows up to 35 TIC owners in
any one property. The typical investment in whole commercial building begins
at $1/2-$1 million. Through TIC ownership, the average person is able to
enjoy ownership in an institutional-type property with a minimum investment.
Minimum purchase requirements are structured to meet this limitation and can
range as low as $50,000-$150,000 equity. Besides reliable income and growth
potential, these properties are able to attract tenants with greater
financial strength and stability than possible for the individual landlord.
What happens if I fail to close
on my 1031 exchange?
You will have to pay your capital gains taxes. Failure to close is the top
reason clients reveal as to why they pay capital gains. By identifying a TIC
property, you can reduce your potential tax risk, and avoid a failed
closing. If you fail to close on other identified properties, you are able
to move all your proceeds into the TIC property you identified.
Is there any liability exposure
associated with TIC ownership?
The mortgages on most of the TIC properties offered are non-recourse. The
TIC debt structure generally allows for the debt financing to assumed.
Assumption usually occurs without the need for qualification or loan
assumption fees. Real Estate liability and risk remain present but may be
reduced by experienced diligent management and adherence to ownership of
higher grade properties.
What if I want to sell my TIC
On a decision requiring unanimous vote, such as a sale decision, a 75% vote
by the TIC owners will be sufficient to initiate the impasse resolution
procedure. This procedure allows the TIC owners with 75% or more of the
property to make an offer to buyout the dissenting owner with 25% or less of
the property. The dissenting TIC owners can either: (1) accept this offer,
(2) buy out the 75% TIC owners at the same price per percentage ownership,
or (3) change their dissenting vote to a consenting vote. Know each TIC
organization rules to confirm owner vote procedure.
happens to my TIC ownership if I die?
Your ownership interest will pass to your heirs pursuant to your will just
like any other asset. They will also receive a stepped-up tax basis to
fair-market value, but you should check with your CPA or tax adviser because
not all circumstances are alike. The income taxes which were deferred
because of your 1031 exchange are forgiven forever.
Real Estate Brokerage Company with expertise in §1031 Exchanges. Their main
function is to represent the interests of the §1031 buyer rather than to the
property broker who has a fiduciary responsibility to the seller.
Internal Revenue Code, Section §1031 states that neither gain nor loss is
recognized if property held for investment or for productive use in a trade
or business is exchanged for property held for investment, trade or
business. There are several kinds of §1031 exchange methods used today,
including delayed exchanges, simultaneous exchanges, and reverse exchanges.
§1031 Tax Deferred Exchange
An exchange where, pursuant to "An Agreement" the taxpayer transfers
property held either for productive use in a trade, business or for
investment and receives a new property to be held either for productive use
in a trade, business or for investment.
Year when the IRS held a hearing to "clean up" the Tax Reform Act of 1984
and provide uniform terminologies. A main result of this revision was that
the IRS eventually had a change of attitude toward Delayed Exchanges by
accepting them instead of fighting them. 2002 was also a defining year.
A qualified intermediary who agrees to assist the exchanger to affect a
tax-deferred exchange. Also described as a facilitator or an intermediary, a
qualified intermediary cannot be the taxpayer, a related party, or an agent
of the taxpayer.
The basis of a property adjusted for any capital improvements or
depreciation. To calculate the adjusted basis, add the basis (the cost of
the property), to the cost of any capital improvements made to the property
during the taxpayer's ownership, and subtract the depreciation taken on the
property during that specific time period. Once the adjusted basis is known,
the gain or loss can be computed.
An increase in an asset’s value.
Dividing investments among different kinds of assets, such as stocks, bonds,
real estate and cash, to balance the risks of investing. Asset allocation
models vary based on an individual’s specific financial goals and situation.
System of measuring investment in property for tax purposes.
Example: Original cost, plus improvements, minus depreciation taken.
Basis in the Replacement Property
In an exchange, the deferral of the tax on the gain is accomplished by
requiring the taxpayer to carryover (substitute) the basis of the
relinquished property to the replacement property with suitable adjustments
in the event additional consideration is paid.
An extended period of falling value of the overall market, accompanied by
In an exchange of real property, any consideration received other than real
property is "boot." The amount of gain recognized is always limited to the
gain realized or boot, whichever is the smaller amount. For a transaction to
result in no recognized gain, the taxpayer must receive property with an
equal or greater market value and debt than the property relinquished, and
receive no boot. In exchanges, there are two types of boot: cash boot and
mortgage boot. Cash boot is cash or anything else of value received.
Mortgage boot is any liabilities assumed or taken subject to in the
An individual or firm that is in the business of buying and selling
securities. Broker/dealers are registered with the Securities and Exchange
An extended period of rising value of the overall market.
Person who wants to acquire the exchanger's property. For a three- or
four-party exchange, the buyer usually has cash.
Increased market value of an asset as measured by share price.
Difference between the sales price of the Relinquished Property less selling
expenses and the adjusted basis of the property.
Class “A” property
Most prestigious buildings competing for premier office users with rents
above average for the area. Buildings have high quality standard finishes,
state of the art systems, exceptional accessibility, and a definite market
Also referred to as a simultaneous exchange when the Exchanger transfers out
of the Relinquished Property and receives the Replacement Property at the
Control of the cash earnings without real physical possession by the
Exchanger or their agent.
The transfer of title of real property in a real estate transaction.
Tax on an exchange transaction is not paid at the time of transaction but at
the time the replacement property is sold. Deferral is accomplished by
substituting, or carrying over the basis of the taxpayer's relinquished
property to the replacement property making any necessary adjustments for
additional consideration paid.
term currently used in place of "Non-Simultaneous Exchange" or "Starker
Exchange." A type of exchange where the Exchanger utilizes the exchange
Also known as non-simultaneous, deferred, and Starker. A delayed exchange is
when the Replacement Property is received following the transfer of the
Relinquished Property. All potential Replacement Properties must be
identified within 45 days from the transfer of the Relinquished Property and
the Exchanger must receive all Replacement Properties within 180 days or the
due date of the Exchanger's tax return, whichever comes first.
Decline in value of an asset. Property depreciation occurs due to general
wear and tear.
Exchanges of like-kind property ordinarily do not trigger any depreciation
recapture (that is, deductions taken in excess of straight-line depreciation
under Section §1250 IRC). When there is an exchange into a property of lesser
value, or when the exchange consists partly of cash and property not of a
like-kind, consideration must be given to the depreciation recapture
provisions of Section §1250 and the higher capital gain tax rates for
Vested owner deeds directly to the final owner. Doesn't eliminate the duties
of the Qualified Intermediary to acquire and transfer the relinquished
property and acquire and transfer the Replacement Property.
A disqualified person is
the agent of the Exchanger at the time of the exchange. Anyone who has
acted as the Exchanger’s employee, attorney, accountant, investment banker
or broker, related party as in family or related party having a 10% interest
in the respective partnership, corporation or trust, real estate agent or
broker within the two period ending on the date of the transfer of the first
relinquished property is considered by the IRS as a disqualified person.
There is an exception applying to the person who performs services with
respect to only exchanges of property under IRC
including routine financial, title
insurance, escrow or trust services. Attorneys are excepted from the
disqualified person rule but only if tax or legal services have not been
provided within the two year period. The advice of an attorney and
accountant are suggested to understand the specific tax consequences of an
Similar to asset allocation, diversification is a strategy designed to
reduce overall portfolio risk.
The practice of investigating a potential investment.
The "cash" and other "property" available at time of closing on the sale of
the relinquished property.
Exchanger or Exchangor
Party wishing to defer tax on gain on the exchange of investment property.
The replacement property should be received by the taxpayer within the
"Exchange Period," which ends on the earlier of 180 days after the date
which the taxpayer transferred the property relinquished, or the due date
for the taxpayer's tax return for the taxable year when the transfer of the
relinquished property occurs (such as April 15th). The exchange period is
180 days, due to the Taxpayer's ability to extend the date of payment.
The amount obtained for a property minus the property's adjusted basis, and
transaction costs. No matter what the adjusted basis of a property is,
there's no gain until the property is transferred. There are two types of
gain "realized gain" and recognized gain." Realized gain is the difference
between the total consideration (cash and anything else of value) received
for a piece of property and the adjusted basis. Realized gain is not taxable
until it is recognized. Gain is usually, but not always, recognized in the
year which it is realized. If gain is not recognized in the year it is
realized, it is said to be deferred. In an exchange under Section §1031,
realized gain is recognized in part or in full to the extent that boot is
received. See Boot. Where only like-kind property is received, no gain is
recognized at the time of the exchange.
Interest earned for the duration of the exchange that is payable at the end.
The replacement property must be identified within 45 days of the close of
escrow/closing the relinquished property. If the 45th day happens to fall on
a weekend or legal holiday, it is not to be extended.
Real estate that generates cash flow.
The party who facilitates a tax deferred exchange by acquiring and selling
property in an exchange. The intermediary plays a role in almost all
exchanges these days. He or she neither begins nor ends the transaction with
any property. He or she buys and then resells the properties in return for a
The degree to which an investor or business is using borrowed money.
To convert assets into cash.
Any valid property for any other valid property if the property(s) are held
for productive use in trade, business or for investment purposes.
The ability of an asset to be converted into cash quickly.
Association of Securities Dealers (NASD)
A self-regulatory securities industry organization responsible for the
operation and regulation of the stock market and for conducting regulatory
reviews of members' business activities.
A property lease in which the tenant pays all expenses normally associated
with ownership, such as utilities, maintenance, repairs, insurance, and
Total assets minus total liabilities of an individual or company.
A loan whose terms include the lender agreeing that its sole remedy in the
event of failure to repay will be to foreclose against the property securing
NNN Triple lease
A lease that requires the tenant to pay for property taxes, insurance and
maintenance in addition to the rent (also referred to as Net Net Net Lease
or Triple Net Lease).
The day-to-day expenses of running a business.
Income other than capital gains.
Income derived from business investments in which the individual is not
actively involved, such as a real estate limited partnership.
All investments collectively owned by the same individual or organization.
Premium TIC Property
Tenants-In-Common titled real property with
superior income and appreciation potential generally leased by a financially
secure lessee in a stable or growing population.
A cost segregation
study to improve profitability by
of current and future federal (and state taxes where applicable),
reduction in local property taxes, and the ability to retire assets when
they are replaced.
The corporation who acts as the accommodator in the exchange. A qualified
intermediary is identified as follows:
a related party to the Exchanger, (e.g. agent, attorney, broker, etc.);
Receives a fee;
Acquires the relinquished property from the Exchanger; and
Acquires the replacement property and transfers it to the Exchanger.
Gain that is not necessarily taxed. In a successful exchange the gain is
realized but not recognized and thus not taxed.
Amount of gain which is subject to tax when property is disposed of at a
gain or profit in a taxable transfer.
Old property that is being sold by the Exchanger. (Formally called the Down
leg property, currently called Phase I property).
New property being acquired or the target property being brought by
Exchanger. (Formally called up leg property, currently called Phase II
The profit made on an investment, expressed annually as a percentage of the
total amount invested.
An individual who is licensed to sell securities and has the legal power of
an agent, having passed the Series 7and Series 63 examinations. Usually
works for a brokerage licensed by the SEC, NYSE, and NASD.
The possibility of loss of capital on an investment.
Term identifying the requirements to protect the Exchanger's money and the
Securities and Exchange Commission (SEC)
The primary federal regulatory agency for the securities industry, whose
responsibility is to promote full disclosure and to protect investors
against fraudulent and manipulative practices in the securities markets.
Securities Investor Protection Corporation (SIPC)
A non-profit membership corporation established by Congress that insures
securities and cash in customer accounts up to $500,000 (up to $100,000 in
cash) in the event of brokerage bankruptcy.
The person who owns the property that the taxpayer wants to acquire in the
exchange in a three or four party exchange.
Property that's deeded to the Intermediary whereby the Intermediary deeds to
the final owner.
Exchange without any time between the sale and purchase.
Also referred to as a concurrent exchange when the Exchanger transfers out
of the Relinquished Property and receives the Replacement Property at the
A term used to describe delayed exchanges. "Starker vs. Commissioner"
established the delayed exchange concept. The term "starker exchange" is
used as another way of referring to delayed, deferred or any other
Having other tax benefits that typically result in tax savings.
Also known as the exchanger. A taxpayer has property and would like to
exchange it for new property. While all parties in an exchange are
theoretically taxpayers, this term applies to the party who expects to
receive tax deferred treatment under Section §1031.
Tax Reform Act of 1984
In the Tax Reform Act of 1984, Congress addressed the IRS's continued
displeasure with the Starker decision by amending Section §1031 to allow
Delayed Exchanges; but only if all of the exchange property is identified
and acquired within specific deadlines (see Exchange Period). And most
important in the Conference Report accompanying the 1984 Act, Congress
specifically reaffirmed that a "sale" followed by reinvestment in like-kind
property doesn't qualify for tax deferral under Section §1031. So to qualify
for tax deferral, it is still essential to cautiously structure an exchange
to avoid actual or constructive "receipt" of proceeds of sale and to prevent
characterization of the transaction as a taxable sale and reinvestment.
A technique that allows an investment to be legally exempt from federal,
state, and local taxes to varying degrees.
Any cash paid by way of commission or other expense in an exchange.
Transaction costs are deducted in computing the consideration received.
A tax assessed by a city, county or state on the transfer of property that
may be based on equity or value. The use of direct deeding in an exchange
avoids additional transfer tax.
Perceived to be below its value.
For additional Real Estate Terms Glossary see
For Exchange Topics see
IPX Exchange Topics
For more 1031FEC Frequently Asked Questions
Duties of an Executor and
Pay No Tax
- Properly Structured Tax Free Gain and Partial Tax-Free Income