1031, TIC Agreement, Debt sharing agreement

2 Replies

Greetings. I have been searching the forums and still have questions regarding my situation. 

1) I own two one bedroom apartments in Minn that are in *my name with my wife* that we are in the process of selling to do a 1031 exchange.

2) I have identified a 24 unit apartment building in MO that I have under contract. This property will be purchased with two partners. One will own 50% of the property and the other about 10%.

3) I live in a community property state.

From my understanding of 1031 rules I need to exchange the property from and into the same taxpayer id. Since I live in a community property state I can set up a disregarded LLC in MO to exchange my 1031 into and hold title to the new property. The new property will have to be held as a TIC and need a TIC agreement between all partners. I have also read that I will need a debt sharing agreement, but have not really seen an example of what is included in that (anyone have pointers?)

The question for you all:

1) Any advice on what should be in the TIC agreement (anyone have example agreements?)

2) How will this situation impact my commercial loan and is there anything I need to start working on earlier in the loan process so this isn't an issue at closing? 

3) I plan to create a single LLC in a year or two and transfer ownership into that single LLC to make it easier to refi/sell in the future. Any words or advice for how to do that or issues to be aware of?

Any other thoughts about this situation is greatly appreciated. I have been trying to piece together bits of information online and in the forums and hope this post might be helpful to others in a similar situation.

@Carnet Williams , The disregarded LLC is the key to the 1031 portion of your issue. Keep in mind that 1031 is a federal statute whereas community property is a state level thing. So for purposes of 1031 you and your wife are one and the same taxpayer anyway by virtue of your joint tax return. But make sure that works on the state level.

When you're dealing with two or more tenants in a tic situation it may be worth your while to actually set up a separate operating entity that the tenants are all members of in equal proration to their tic membership.  This entity basically acts as the operations arm for the property and has all operational authority.  The tenants simply collect checks.  It's separation from the property from another degree which isn't a bad thing.

And if you like that model then there's no reason to create a new LLC and contribute the property into that LLC unless you really want. The new LLC adds a layer of cost and when you do that you create a situation where the taxpayer changes and if you ever decide to sell again it is the LLC that would have to sell and do the 1031. The individual members don't have the option of going their separate ways like they could if they were tenants in common. Just some more food for thought.

@Dave Foster that's a great idea having the operating entity. So the structure looks like this?

1) Property is held as a TIC with a TIC agreement (do we need a debt sharing agreement also?) between the owners

2) Property is managed by Operating Entity LLC that members own in proportion to their TIC ownership

3) Operating Entity LLC manages the P&L of the property. Holds the bank account and signs the contract with the PM and any other vendors

4) Operating Entity LLC pays each owner their pro-rata share of distributions (cash flow), but also can make capital calls pro-rata from each owner

5) When/if we decide to sell property, each TIC owner can choose to do what they want with the proceeds (1031 or not).

- Question. If we decide to refinance and pull money out, then each owner according to the TIC agreement would take our their pro-rate amount? Only upon a sale are the proceeds disbursed.