TIC Benefits and Risks
Learn more about the potential benefits and potential risks of 1031 TIC investments.
Purchasing 1031 exchange replacement properties in the form of Tenants in Common (TIC) is a popular option for many investors.
There are a number of potential benefits of exchanging into a 1031 TIC (Tenants in Common) property. As a 1031 investor, reviewing the potential benefits and potential risks prior detail prior to investing. Learn more about common FAQs about TIC investments for a 1031 Exchange.
For more information and experienced guidance about TIC investments, contact 1031 DST Solution presented by Corcapa 1031 Advisors.
Potential Advantages of TIC Investments
1031 TIC’s are attractive for the following reasons:
Diversification
Investors can select multiple Tenants in Common (TIC) properties as part of their 1031 exchange allowing diversification of asset classes, cities and level of needed non-recourse debt.
Potentially Greater Cash Flow
Most Tenants in Common have a projected cash flow based on the anticipated rental income less expenses. This could be a higher net cash flow than you are currently receiving on your rental property. As with all real estate the income cannot be guaranteed because the rental income and expenses can increase or decrease unexpectedly.
Larger Property Access
Access to Institutional Grade properties which are typically larger commercial properties that previously required significant capital to purchase.
Lower Minimum Investments
TICs have minimum investments often as low as $100,000 – $300,000 of equity allowing investors to diversify. If you require a lower investment amount, let your Corcapa 1031 Exchange representative know and we may be able to negotiate a reduction in certain circumstances.
Non-Recourse Loans
Virtually all the loans within the TICs that are approved by DAI Securities, LLC are non-recourse which means the investor does not personally guarantee them.
Financing Access
Easier access to financing for investors needing debt on their replacement property.
Potential Risks of TIC Investments
As with any investment, 1031 exchanges and TICs have certain risks:
Illiquidity
A TIC interest is an illiquid investment and there is no current active secondary market for selling your interest.
Sponsor Performance
While Tenants in Common owners have voting rights on major activities such as leasing, sales and refinance, there is dependence on the performance of the sponsor.
Tax Status
Tenants in Common are structured according the Revenue Procedure 2002-22. Corcapa and DAI Securities, LLC typically work with sponsors and properties that have “should” level tax opinions regarding 1031 exchange tax compliance but its possible the IRS would rule unfavorably on a TIC offering and this could result in back taxes and immediate tax liability.
Potential for Property Value Loss
All real estate investments have the potential to lose value during the life the investment.
Potential for Foreclosure
All financed real estate investments have the potential for foreclosure.
Reduction or Elimination of Monthly Cash Flow Distributions
Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is a potential for suspension of cash flow distributions.
Additional Expenses
Fees and Expenses of each offering should be carefully evaluated. Multiple owner offerings typically have additional expenses to owning real estate on your own and these fees should be weighed against specific capital gains tax liability. All investors are encouraged to have their tax and legal counsel advise them on taxes including any federal and state capital gains taxes, depreciation recapture and the recent 3.8% Medicare tax which could be applicable.
Conflicts of Interest
Conflicts of interest may affect a TIC investment and should be evaluated.
Past Performance
Past performance of investments is not indicative of future performance and doesn’t ensure earnings or appreciation. Principal loss or reduction could occur based on real estate performance and market conditions.
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