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1.  Can I exchange for property of less value?

2.  Do I have to exchange for the same type of property?

3.  Does the exchanges have to been done simultaneously?

4.  What is a QI?

5.  Will IRS audit a tax free exchange?

6.  Can I change the name on the title of the new property?

Alternative to Investment Property
Jack Shea

New IRS Procedure on 1031 Tax Free Exchange Tenant-in-Common (TIC) Exchanges

Smaller investors can now invest in larger, professionally managed real estate and enjoy the benefits of tax shelter, growth, leverage and income without the thrill of management. An exchange is not necessary to purchase a TIC Property.

Funds from other sources can be used. The Internal Service issued Revenue Procedure 2002-22 on March 20, 2002 giving definitive guidelines for structuring tenant-in-common (TIC) exchanges. Now, taxpayers can exchange into a deeded share of a large, professionally managed property such as a Home Depot, Walgreen’s, Staples, etc. For several years sponsors have sold TIC investments as replacement properties in 1031 exchanges.

To qualify for a tax-free exchange, the replacement had to be like- kind. That is, investment real estate and not a partnership interest. All of the standard 1031 procedures are followed when investing in TIC properties, including the use of a qualified intermediary. The qualified intermediary prepares the required documents and escrows the sale funds until the taxpayer selects a tenant-in-common investment for a replacement property.

Many exchangors are now identifying three potential tenant-in-common projects, and then doing their due diligence research before closing on one or more properties within the 180 day period. Other taxpayers are identifying tenant-in-common investments as a back-up in the event they cannot find suitable replacement property. The recognition of tenant-in-common interests by the IRS present a new option for the average investor.

Previously, large investors have been using these as single buyers. Since the ruling, investment in TICs has doubled each year, to a projected $2 Billion for 2004. Many alternative tenant-in-common offerings are available.

A typical TIC investment is a $10 million dollar property with $3,500,000 of Investor’s cash and $6,500,000. of non-recourse debt. They include malls, office building, factories, apartment complexes, nursing homes and other types. The minimum investment is usually $100,000. and the return is about 8% cash on the cash invested. Due to the debt, the depreciation shelters much of the cash distribution.

Growth is projected at 2%, which would yield investors 6% on invested cash. In 2003 many TIC properties appreciated at 4% to 5%, yielding the owners a total return of about 24%. That is, 8% cash, 15% growth in equity, plus 1% buy down on the debt. They are planned for about a five-year term and at the sale, the investor may do another 1031 exchange into any real estate or tenant-in-common investment.

Contact Jack Shea at Keys Capital Inc. For information on available
TIC properties or with any other questions on the 1031 Tax Exchange.

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