The TIC, or Tenant in Common, Exchange is a process that makes it possible to sell property without having to pay exorbitant capital gains taxes. As part of the process, the equity realized from the sold property is invested in a TIC exchange involving some type of institutional grade property. This makes it possible to continue receiving some benefit from the investment but without the need to pay the higher rate of taxes.
One of the easiest ways to understand how a TIC Exchange functions is to consider an example situation. An owner of real estate such as a home or rental property may grow tired of managing the investment and incurring maintenance and other expenses. After choosing to sell the property, the former owner may find that the amount of equity in the property is not enough to reinvest in a similar endeavor. Instead, the proceeds from the sale are used to invest in a TIC Exchange. The exchange strategy makes it possible to acquire an interest in properties such as hotels, office buildings, apartments or rental homes, hospitals, or warehouses.
In the United States, there are specific rules and regulations that must be complied with in order to qualify for tax breaks via a TIC Exchange. Any deviation or failure to comply with all regulations will result in an inability to defer capital gains taxes. Essentially, there are five points to keep in mind when preparing for and executing a TIC Exchange.
First, all the money received from the sale of the original property must be invested in the TIC Exchange. It is not allowed to invest in properties that are not at least as valuable as the total proceeds from the sale. Should the investor fail to invest all the proceeds from the sale in a property that is worth as much or more than the recently sold property, it will not be possible to defer capital gains.
A qualified intermediary must be employed as part of the transaction. In a sense, the intermediary becomes the designated seller and is responsible for managing all the money received from the sale of the recently sold property. The intermediary must also verify that a hundred percent of the proceeds are being held and not just a portion.
The requirement of an identification period follows. During this time, no less than three potential replacement properties must be investigated and deemed to meet all qualifications. The data regarding these three properties must be documented in written form. Generally, the identification period associated with the TIC Exchange is set at forty-five days.
As a fourth stipulation, a ceiling is placed on the value of any replacement properties considered for the TIC Exchange. Just as all of the proceeds from the original sale must be involved in the acquisition, it is only allowed to invest in properties that are no more than twice the proceeds from the sale.
There is one potential exemption to the ceiling value of the replacement property and the selection of a minimum of three potential properties. If the circumstances meet any current exemptions allowed by the Internal Revenue Service, it may be possible to waive these two requirements in favor of comparing the aggregate value of the replacement properties to the fair market value associated with the properties. However, this type of exemption is somewhat difficult to receive. Checking with a tax expert can help the investor to determine if a TIC Exchange of this type is feasible.
