3 Mistakes to Absolutely Avoid in a 1031/TIC Exchange
Posted: Friday, August 12, 2005
by Paula
http://www.savegainstax.com
We've all made bad decisions in the past.
Don't you just hate to hear "I told you so" from your
friends and family? Or, maybe you catch yourself saying "If
only I'd have..."?
Personally, I'm one of those people who prefers to learn
from someone else's mistakes. If you're at all like me, and
you have thought about doing a 1031 exchange into a tenant
in common (TIC) property, take note. You can avoid making
the 3 Major Mistakes that others wished they knew before
leaping from the frying pan into the fire!
what a 1031 exchange into a tenant in common property is.
It's a fairly well-kept secret in and of itself.
A 1031 exchange is when an investment property owner sells
his current property and exchanges it for a "like-kind"
property of equal or greater value. By doing so, he defers
the payment of capital gains tax and the consequences of
recaptured depreciation.
By exchanging into a tenant in common property, or a TIC, he
becomes a part owner of a large commercial property managed
by professionals, who in turn pay him a monthly income. It
comes with fewer strings than private annuity trusts,
charitable remainder trusts, or an exchange into another
property that still needs your attention and often drains
your wallet. I find that very few individuals, CPA's,
attorneys, or even financial advisors are sufficiently well versed in
the 1031 exchange into a tenant in common property. It can be a
terrific deal!
Those who benefit most from this type of an exchange usually
have several things in common.
1. They own investment property that has appreciated
significantly in value.
2. They are tired of all the hassles of property management.
3. They don't want to pay huge amounts of capital gains tax
if they sell.
4. They would like to have a significant increase in monthly
passive income.
5. And, lastly, they still enjoy the relative stability of
owning real estate.
Know of anyone who fits this description? If so, read on.
There are 3 Major Mistakes that can turn your investment
into a nightmare. So, avoid these at all costs when
contemplating this type of exchange.
Mistake #1: Dealing with an investment company that does not
have their act together. If they seem like they don't know
what they are doing, run! Look into their history of TIC
offerings, and ask for referrals from satisfied clients.
Ideally, this should be their only business. Are all their
properties "A" grade commercial buildings, or are they
somewhat less desirable? Ask how they find the properties
and what criteria they use to select them. Quality
properties are hard to find and sell out quickly. In real
estate, the quality properties will remain more desirable,
even when the mediocre properties start to lag. Ask yourself
if you would like to have your office in that building, or
go to see your doctor there, or if you'd shop in that strip
mall.
Note: Also be cautious going the private route and getting
into Limited Partnerships when only one or two major players
make all the decisions. And, unless you have extensive
experience in commercial property, don't get together a
bunch of your friends and choose this property on your own.
Mistake #2: Choosing an Accommodator that has not done many,
many of these transactions. This Qualified Intermediary
makes sure all the documents and money transfers meet all
the IRS guidelines. They will set up your LLC. You must use
an Accomodator that you don't already have a relationship
with. Your family attorney or estate planning attorney may
not qualify. The last thing you want is the IRS sending you
a hefty bill for taxes or penalties, or the whole
transaction falling through due to an incompetent or
inexperienced Accommodator!
Mistake #3: Skimping on the property management company.
They are extremely crucial to the performance of your
investment. You will be depending on them to handle the day
to day problems that arise, carry the proper insurance, pay
the property taxes on time, and keep your building fully
occupied and in tip top shape. This company should offer you
a long term triple net lease that has your annual income
percentages spelled out, along with scheduled increases.
There aren't many out there willing or able to do this.
Ask for an accounting of their track record with other
properties, how long they've been in business and for a
list of any judgments brought against them. See if they've
ever requested special assessments, or had any foreclosures.
A good management company is worth its weight in gold. You
want them to make a tidy profit, because their performance
is directly related to your investment stability.
Well, there you have it. Don't be "Penny wise and Pound
Foolish". This is one time that hiring the best will
definitely bring you the most favorable results. It should
truly be a win-win situation for everyone involved.
By avoiding the 3 Major Mistakes for a 1031 exchange
into a tenant in common property, you will be the one
saying "I told you so" as you collect your monthly check
and watch your investment grow!
How much would you pay to save thousands in Capital Gains
Tax? I'll teach you for free in a Teleconference that may
change your life. Sign up at ==> http://www.savegainstax.com
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