It’s the dream in the end isn’t it? You work hard, you manage your money correctly, and then eventually it’s time to kick back. If you’re a real estate investor though you’re facing one big hurdle - taxes. If you own a property long enough to have it basically fully depreciated you’re going to be in for a very harsh reality when it comes time to look at your exit. While it’s true that capital gains are down to 15% recapture is at 25% and that means you’re in for a pretty hefty bill if you’ve ridden the wave of appreciation that this area has enjoyed.

There are several options that have emerged for the savvy retiring real estate investor over the last handful of years. One of the most popular options, as evidenced by the tremendous boom in the industry, is the TIC or Tenant-In-Common (TIC for the balance of this post).

TICs are individual deeded, fractional interests in real estate. Most of the time these TICs are shopping centers, very large multi-family properties, or office buildings. TICs generally are put together by TIC sponsors and then are offered in one of 2 ways. Either the TIC is packaged and marketed as ‘Real Estate’ or as a ‘Security’. The are some notable differences between the two and the issue is a hot one for the NAR, the SEC, and the IRS right now. Brian Foley [CFP, JD] had the following to say about Securitized vs. TICs offered as “Real Estate”.

“Why Take the Risk?”

As you begin the quest to “Retire From Real Estate,” a 1031 exchange poses an opportunity to defer capital gains and thus allow you to enjoy greater retirement income…and with a TIC (Tenant-In-Common), also without all the hassles of “hands on” property ownership. TIC sponsors make it easier to locate properties into which you can exchange the equity in your current investment property.

Yet in response to the NASD’s view that TIC’s are actually securities - and thus must fall under securities regulations - some TIC sponsors now offer “securitized TIC’s.” That is, the TIC’s are actually sold as securities. It is still a gray area as to whether sponsored TIC’s are indeed “securities” because the IRS has yet to come down on the issue one way or the other. It’s most recent pronouncement on 1031 exchanges (Rev. Proc. 2002-22) left that issue out entirely.

Yet one thing is clear. Code Section 1031, which allows for capital gain deferral, specifically excludes exchanges of property into “stocks, bonds, notes” or “other securities.” So while the IRS clearly excludes exchanges into securities, and sponsors of securitized TIC’s explicitly proclaim the property as a security, are they not putting themselves right into the IRS’s crossfire?

The bottom line is that taking on that additional risk is unnecessary, especially when there are other available options for you to “Retire From Real Estate.” Because, after all, retirement should include only as much risk as unnecessary.

TICs offer an investor the same benefits of investment property ownership without the hands-on day-to-day involvement in the asset. Owners take depreciation, benefit from appreciation, take the monthly cash flow, and receive mortgage interest deductions. What they don’t do is take calls in the middle of the night or make visits to collect the rent. Most TIC sponsors make a monthly pay-out of the investors portion of the cash flow. The deep tax benefits combined with equity preservation and monthly cash-flow make TICs ideal for someone who wants to absolve themselves of the day-to-day and needs a consistent predictable income and who is also a fan of real estate as an investment.

PROVEST Real Estate always has TIC interests available through a variety of national partners. For details on two new offerings through one of our preferred national partners enter your name and email in below. A confirmation email will be sent to the address provided and you will then have immediate access to the page.