Have DSTs Replaced TICs for Real Estate Syndication?

Real estate syndications are commonly used by taxpayers conducting 1031 exchanges of real property. In this article, we are going to talk about the current state of real estate syndications and whether DSTs have effectively replaced TICs.

DSTs vs. TICs

To some degree, the old TIC (Tenancy-in-Common) syndications have fallen out of favor. There are still TIC syndicated deals out there and there are instances in which TICs are an easier method for putting together a consortium of buyers.

It’s most popular with friends and family who want to get together and acquire a property as tenants-in-common. I also see it with developers who want to bring in friends and family to buy the “dirt” that will eventually become a development.

However, by and large, DSTs have replaced TICs as the modality for real estate syndication. There is an enormous amount of money going into syndicated real estate right now – particularly DST syndications. There is not enough inventory in the securitized world to satiate the demand. As a result, some firms will have trouble because there will be clients knocking on the door wanting to get in when the deal is already buttoned up.

Contact CPEC1031, LLC

If you have further questions about DSTs or TICs, don’t hesitate to reach out to the team at CPEC1031. Our 1031 exchange intermediaries have over twenty years of experience facilitating exchanges of all shapes and sizes. Contact us today to learn more about how we can help with your 1031 exchange!

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Tips for Tenancy in Common Property

A lot of times people own real estate in a partnership or LLC that's taxed as a partnership. If the property goes up in value some of the partners may be inclined to sell the underlying real estate while other partners are not so inclined because they don't want to pay the taxes.

This divergent opinion between the partners can be exasperated if there's been a death of one of the partners and the heirs of the now-deceased step into the partnership with a stepped-up basis and perhaps a more cavalier attitude about selling the underlying real estate. Because they may not have much of a tax burden if the property is sold, they may be less concerned about the tax consequences of a sale.

Setting up a Tenancy in Common

Furthermore, they may not want to be in a partnership with all the other folks. So when this sort of divergent opinion exists it may be a prudent step to bifurcate the ownership of the asset so that rather than having a partnership we would have a tenancy in common. If a sale were to ever occur, the exchange minded folks could be in one entity, and the cavalier folks that have a high basis and are less concerned about taxes would be in a separate distinct tax-paying entity.

When the sale occurs, hopefully we have two sellers on the purchase agreement, and two sellers that are separately 1099’d by the title company. The exchange minded group can set up their proceeds to go with a qualified intermediary and defer their gain, while the cavalier high basis folks that are less concerned with the tax can simply take their share of the proceeds and go.

Give Yourself Time

When do you want to set up this bifurcation? Do you want to set up the split up on the eve of the closing right before you sell the relinquished property? Do you think the IRS will respect a last minute switch? Probably not. The better course of action is to have this conversation amongst the partners early, before there's even a tacit agreement to sell the property and to break up the property well in advance of any proposed sale. Let some time pass after the break up before you actually sell the property. The IRS is much more likely to respect a reconfigured ownership arrangement if it is done well in advance of any sale and some time has passed.

1031 Holding Requirement

Furthermore, remember there's a holding period requirement in section 1031 that the relinquished property must have been held for investment or business purposes. If you do a drop and then a swap immediately you may not have held your property for a sufficient period to satisfy the requirements of 1031.

• Start Your Exchange: If you have questions about 1031 exchanges of TIC property, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Tenancy-in-Common Distributions in a 1031 Exchange

Many taxpayers who are looking to do a 1031 exchange on tenancy-in-common property have questions about distributions. In Giurbino v. Franchise Tax Board, the California Board of Equalization discusses many of the concepts that would be involved in an application of section 1031 to such a transaction.

Tenancy-in-Common Distributions

In general, the determination of whether the TIC (Tenancy-in-Common) distributions would be sustained as actual (vs. fictional) distributions would involve an assessment of the following:

• Who negotiates the sale

• Who enters into the purchase agreement

• The amount of time that passes between negotiation and consummation of the sale

• The motivation behind the distributions (whether the court thinks this was done solely to obtain a different tax outcome without changing the underlying nature of ownership)

"Substance Over Form"

In making this determination, courts apply a “substance over form” approach. Notably, some of the decisions referenced in Giurbino also took into consideration when the distribution deeds were recorded and whether there were restrictions under lending arrangements on a transfer of the property.

The IRS has also recently (in 2008) amended the partnership tax return by the addition of questions relating to the completion of like-kind exchanges and distribution of TIC interests in partnership property during the current or prior tax year. For this reason, some commentary on “drop and swap” transactions suggest waiting for a period of up to two years following distributions before completing a like-kind exchange. However, there is no particular holding period requirement, nor is there any particular holding period which would absolutely insulate the transaction from scrutiny.

• Start Your 1031 Exchange: If you have questions about earnest money deposits or other items on the closing statement in a like-kind exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

TIC (Tenancy in Common) 1031 Exchanges

TIC stands for a Tenancy in Common which is an old-fashioned way to own real estate. It's a co-ownership arrangement going back to Old English common law where the serfs got together and collectively pooled their money to acquire an estate. In this article, we explain the benefits of a TIC as they relate to 1031 exchanges.

Benefits of a TIC

If you're looking to redeploy some cash and you can't afford to buy a real estate investment on your own you can bring in a TIC co-owner - someone to invest with you on that replacement property. Each of you would have an ownership interest in the property proportionate to your contribution. So if you provide 45% of the down payment you would be entitled to 45% of the property. Your co-owner will then get the other 55% if they put down their proportionate share of the purchase.

Partnership Interests are Excluded from 1031

The reason that tenancy in common is so important is that in the Internal Revenue Code section 1031, partnership interests are excluded from 1031. So if I want to bring in money with me on a purchase I can't bring in a partner and own the property in a partnership.

But what I can bring in is an investor or investors as tenants in common and we can take down that property kind of like a pie chart for each of us has a proportionate interest in the property allocated based on how much can we contribute for the buy.

Practice Tip:  If you want to be treated as a tenancy in common, then do not file a partnership tax return with your TIC co-owners for the property, because that may undue all of your hard work in trying to arrange for your interest in the property to be treated as a qualifying interest in real property.

• Start Your Exchange: If you have questions about tenancy in common law, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved