1031 Into Passive Investment Through TIC?

Question

1031 exchanges have been interesting to me, although, outside of a DST, they still require active management.

I received an invitation from a well regarded real estate developer to 1031 exchange into an acquisition they are doing. This is made possible by them setting up a Tenants In Common (TIC) structure.

Has anyone done this before? Looking forward to hearing your experience.

Jake Andronico · Answer

@Paul V.

These are super common. There are pros and cons to everything, DST's included.

Typically:

Pros:

- Fully passive

- Equity growth (hopefully)

- Smooth process

Cons:

- No control

- When they liquidate, you liquidate and need to 1031 again (usually they have other funds set up, however)

- Make sure debt is rolled over correctly

Hope this is helpful! Best of luck to you!

Jackson Hanssen · Answer

@Paul V. I'm in full agreement. In my opinion they're really only good for when you're ready to hang up the spurs, and your inheritors don't want the hard assets, so you keep the deferment rolling until you get a stepped up basis at death. One point of guidance I would give about the 1031 exchange itself. Improvement exchanges are a little more tricky so if you can structure the exchange where all of your equity + debt reinvestment can be dumped in at one time, you'll be able to do a forward exchange instead of an improvement exchange and it will save you on 1031 exchange fees.

Paul V. · Answer

Thanks @Jackson Hanssen.  Great point.  I would be coming in through an LLC, so feel comfortable with liability protection as it relates to other assets, but still, will be on title, so there is exposure.

As a real estate guy I'm still in growth mode and am having a hard time swallowing the dst pill.  Maybe in 20 yrs when im investing for cash flow!

Joe Vesey · Answer

Yes, this is fairly common.  There are some potential downsides to a TIC, but they can be an effective solution for the right situation.  Send me a note if you'd like to discuss.

Jackson Hanssen · Answer

This is a viable path from a 1031 perspective, but I would encourage you to look into what TIC really means. Especially from a legal liability perspective. Because you have to keep the same taxpayer as owner from the relinquished property to the replacement property I'd worry that the legal protection you'd want for a development TIC won't be there.DSTs have high fee but probably are the best path forward for someone who wants to be fully passive and avoid legal risk. It is one of the reason they continue to be popular despite the outrageous fees in my opinion.

1031 Into Passive Investment Through TIC?

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