Posted 08-02-2008 6:00 pm by

You may hear salespeople suggesting you to sell your property, and 1031 exchange it into a TIC investment, known as a Tenant In Common investment.  What is it and is it a good idea?

Tenants-In-Common investments are usually institutional investment grade properties available to accredited investors, and are usually promoted as 1031 exchange targets.  In other words, imagine you own a 6-plex.  You are tired of managing the property, so you want to sell the property.  To defer your capital gains obligation, you decide to 1031 exchange it into another property - one with fewer management hassles.  One option is to exchange your property into a large, institutional grade property.  Instead of owning 100% of a 6-plex, you may now own 3% of a 300-unit apartment, or 1% of a skyscraper, or 2% of a large shopping center. 

You will be owning this large piece of properties with other investors as tenants in common, hence the name Tenants-In-Common investments.  This large piece of property will be run and managed by the general partner or managing member, and you become a passive investor that receives your share of monthly or quarterly cash flow. 

Is investing in TIC investments a good idea?  In my opinion, the number one key to successful investing is having control over your investments.  When you own 100% of your 6-plex, you have total control over whether your 6-plex is well managed or not.  If it does well for you, it's your good work.  If it doesn't, it's your fault.  When you own 3% of a large piece of property, it's run and managed by someone else.  You don't have much say over how they manage your money, so you are at risk of other people mismanaging your investment.  This is why I do not suggest 1031-exchanging your 6-plex into a small piece of a large property. 

However, there is a time where TIC investment can be a beneficial strategy.  Imaging if your 6-plex is worth $1 million, and you are exchanging it into an 8-plex that is worth $950,000.  What are you going to do with the $50,000 left over?  If you took the cash, you would need to pay 15% capital gains tax on the $50,000.  In this case, you may want to 1031-exchange the $50,000 into a TIC investment, thus having some ownership in a large piece of property managed by someone else, while having 100% control over your new 8-plex.

There are many salespeople promoting TIC investments, and they make a good commission on the number of shares you purchase.  In my opinion, buying a TIC investment only makes sense when you have money (known as boot) left over after a 1031 exchange.

---Written by Oliver Wu

Oliver Wu | Advantage Commercial Brokers
The Commercial Broker for
Small Business Owners in Puget Sound
Direct:  (425) 785-6608
Office:  (425) 651-4242 ext. 103
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E-mail:  oliver@acbrokersinc.com
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