1031 Facts

TIC is a form of property ownership in which two or more persons have an undivided, fractional interest in the asset. Each co-owner receives an individual deed at closing for their undivided percentage interest in the entire property. TIC ownership provides the opportunity for the average person or passive investor to enjoy all of the ownership benefits of an institutional-type property with a minimum investment without the hassles of sole ownership like repairs, maintenance, leasing, and managing. TIC ownership interests can be inherited.

Under Internal Revenue Code §1031, a real property owner can sell his property and then reinvest the proceeds in ownership of like-kind property and defer the capital gains taxes. To qualify as a like-kind exchange, property exchanges must be done in accordance with the strict rules set forth in the IRS Tax Code, State and local regulations. A 1031 exchange can offer significant tax advantages to real estate investors. Professional investors have used the 1031 exchange as a safe means of deferring capital gains tax.

The theory behind Section 1031 is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay any tax. In other words, the taxpayer's investment is still the same, only the property or form has changed (e.g. vacant land held for investment exchanged for apartment building). Therefore, it would be unfair to force the taxpayer to pay tax on a "paper" gain.

The like-kind exchange under Section 1031 is tax-deferred, not tax-free. When the replacement property is ultimately sold and is not as part of another exchange, the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax. There is no limit as to the numbers of exchanges which can take place in a lifetime.

A lease that requires the tenant to pay for property taxes, insurance and maintenance in addition to the rent (also referred to as NNN Lease). A variation of the NNN is the Double Net (NN) where the tenant has the same responsibility but the landlord is required to make roof and structure repairs.

Old property that is being sold by the Exchanger or the Down leg property.

New property being acquired or the target property being brought by Exchanger or the Up leg property.

Similar to a NNN lease with the chief difference being that the Landlord pays the property taxes, insurance and maintenance and is reimbursed for all or part of the amount from the tenant as additional rent to the base or market rent.

1. The Three Property Rule ­ The Exchanger may identify up to three properties, without regard to their value; or
2. The 200% Rule ­ The Exchanger may identify more than three properties, provided their combined fair market value does not exceed 200% of the value of the Relinquished Property; or
3. The 95% Rule ­ The Exchanger may identify any number of properties, without regard to their value, provided the Exchanger acquires 95% of those properties.

A Reverse Exchange, sometimes called a "parking arrangement," occurs when a taxpayer acquires a Replacement Property before disposing of their Relinquished Property. A "pure" reverse exchange, where the taxpayer owns both the Relinquished and Replacement properties at the same time, is not allowed. The actual acquisition of the "parked" property is done by an Exchange Accommodation Titleholder (EAT) or parking entity.

Yes. Although the Treasury Regulations still do not apply to Reverse Exchanges, the IRS issued "safe harbor" guidelines for reverse exchanges on September 15th, 2000, in Revenue Procedure 2000-37. Compliance with the safe harbor creates certain presumptions that will enable the transaction to qualify for § 1031 tax-deferred exchange treatment.

In a typical Reverse (or "parking") Exchange, the "Exchange Accommodation Titleholder" (EAT) takes title to (parks) the replacement property and holds it until the taxpayer is able to sell the relinquished property. The taxpayer then exchanges with the EAT, who now owns the replacement property. An exchange structured within the safe harbor of Rev. Proc. 2000-37 cannot have a parking period that goes beyond 180 days.