ID in 45 days no problem?
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Tenancy in common properties-because of how they are packaged, distributed and sold-can provide an alternative to investors struggling with tax-deferred exchange timing requirements. Simply stated, TIC interests allow investors to acquire a percentage or fractional interest of a larger, institutional-quality property that is potentially more stable, secure and profitable than what they otherwise could have acquired alone within the exchange deadlines.
TIC's are, in essence, packaged investment-grade properties; the sponsor's due diligence and inspections have been completed and assumable financing is negotiated and set in place. The investor's property comparisons and due diligence are easily accomplished as security regulations require full and complete disclosure in writing. TIC interests are flexible and allow investors to more easily purchase an interest or value in the amount necessary to satisfy tax-deferred exchange requirements.
A common problem for investors and their advisors when structuring tax-deferred exchange transactions is the difficulty in locating, identifying and acquiring like-kind replacement properties within the stringent IRS exchange deadlines. Many investors wait until the closing of their relinquished property to start the search for a replacement property, after all how often are closings delayed or just fail all together? By the time the closing does occur the tax-deferred exchange identification deadline is imminent. Investors are often forced to rush the search for suitable properties.
Given the difficulty of making a timely identification under the rules exchangers typically evaluate only local properties of a familiar asset class. Replacement properties chosen in this manner are likely to have the same problems that originally motivated the investor to sell the relinquished property such as inflated sales prices, poor cash flow or intensive property management. Investors face a tough choice: settling for a less-than-ideal property to complete the tax-deferred exchange or paying the taxes. If the exchange fails the investor may find themselves with all of the time they need to locate a property but only a fraction of the cash after paying capital gains tax and recapture of depreciation. See your tax advisor for your specific situation.
The other problem that arises is closing on properly identified properties within the 180-calendar-day exchange period. Even where the identification process has been relatively simple-where the investors have no trouble finding properties that make economic sense within the 45-calendar-day identification period-there is no guarantee that the investors will be able to close on the properties in the time remaining.
Closings fail for many reasons: problems discovered during the property inspection, defects in structure, tenant issues and most recently lenders, to name just a few. These problems are difficult in any normal real estate sale; they can turn tax deferral into a tax liability in the tight time frame of a tax-deferred exchange. Failing to take specific steps investors could find themselves in a position where they are unable to close on the property within 180 days and unable to identify any other properties because the 45-day identification period has passed dooming their tax-deferred exchange.
To help control these risks it is common to identify a first choice property (TIC or otherwise) and additional TIC properties as numbers 2 and 3 under the three property rule. You should consult with your Qualified Intermediary and CPA about how this might work for you. TIC interests are direct investments in real estate, and they are subject to all of the risks of owning, operating and disposing of real estate, including illiquidity.
This material is for educational purposes, it does not constitute an offer for purchase or sale of real estate securities. Such offers are solely made through the sponsor's Private Placement Memorandum, which is only available to accredited investors.
