Have you ever wondered how an absolutely terrific concept can go so horribly wrong?
Don't you just hate to hear "I told you so" from your well-meaning friends and family?
Ever catch yourself saying "If only I'd have..."?
I'm one of those people who like to learn from someone else's mistakes. It saves me all kind of heartache and pain. If you're at all like me and have thought about doing a 1031 like-kind property exchange into a tenant in common (TIC) property, my bet is you'll be glad you did. If you can just avoid the 3 pitfalls that can make you wish you hadn't!
Before I let you in on the secrets, let me briefly explain exactly what a 1031 exchange into a tenant in common property is. It's a pretty well-kept secret in and of itself.
Those who benefit most greatly 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 appreciate 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.
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. For those individuals described above, it can be a very valuable transaction. It often comes with fewer strings than private annuity or charitable remainder trusts, or an exchange into another property that needs their attention and drains their cash. I find that very few individuals, CPA's, attorneys, or even financial planners are well versed or knowledgeable in this area.
So what must you avoid at all costs when contemplating this exchange? The following three potentially disastrous scenarios.
First, do not deal 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 and prior offerings. Are the properties "A" grade commercial buildings, or something less desirable? Ideally, this should be their only business. Research the area where the new property is located. A local realtor or chamber of commerce can be very helpful in describing the area and the local economy. The property should already be almost fully occupied with quality tenants. If it was recently "refurbished" be sure to find out why that was necessary and what exactly was done. Be careful with Limited Partnerships when only one or two major players make all the decisions. Ask how they find the properties and what criteria they use to select them. Quality properties are hard to find and sell out quickly. Unless you have extensive experience in commercial property, don't get together a bunch of your friends and try and choose this property on your own. Ask yourself if you would like your office in that building, or see your doctor there, or shop in those stores. Remember in real estate the quality properties always remain more desirable, even when the mediocre properties start to lag.
Second, don't choose an Accommodator that has not done many, many of these transactions. This Qualified Intermediary is the one that makes sure all the documents and money transfers meet all the guidelines. He will set up your LLC. Your family attorney or estate planning attorney is most likely not your best choice. The last thing you want is the IRS sending you a hefty bill for taxes or penalties due to an incompetent or inexperienced Accommodator error.
Third, don't skimp on the property management company. They are extremely crucial to the property performance. 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 to see their track record with other properties, and for a list of any judgments brought against them. Ask them 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 hefty profit, because their performance is directly related to your investment stability.
There you have it. I'm sure you've heard the saying "Penny wise and Pound Foolish". This is one time hiring the best will definitely bring you the most favorable results. It should truly be a win-win situation for everyone involved.
If you avoid the 3 major mistakes for the 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.
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Monday, August 08, 2005
Tuesday, August 02, 2005
Are you tired of Tenants, Toilets and Trash?
Are you tired of Tenants, Trash and Toilets?
-by Paula Straub
(c)Paula Straub - All Rights reserved http://www.savegainstax.com
===========================================================
Wouldn't you rather go to Tahiti?Are you a landlord with rental property whose value hassignificantly appreciated?Are you ready to cash in those profits and take that trip toTahiti?
Before selling your property, check with your accountant whowill tell you that you will be paying $60,000 in CapitalGains Tax to Uncle Sam. Your accountant will also tell youthat adding another $20,000 to your income by that sale iscalled recaptured depreciation. This will bump you into thenext tax bracket and doom you next April 15th into sendingthe IRS a check for maybe another $7,000.
Are you still ready to sell that property?It looks like that trip to Tahiti is going to be sometime inthe far future…
But wait! You decide to check with your realtor and thenfind out about a 1031 exchange to defer your Capital Gains. Your realtor tells you if you buy another like-kind rentalproperty of equal or greater value, you won't get hit withthe gains tax on the sale. That is all fine and good, butit does not really get you out of the headaches associatedwith collecting rent, keeping your unit occupied, findingclean/classy tenants that won't trash the place, nor does itkeep you from getting that 2am call to fix an overflowingtoilet. To top this off, now you have to pay more inproperty taxes and must charge higher rent.
Hmm…maybe this idea is not the ticket to that South Pacificparadise either.
This is the dilemma I heard from my financial clients againand again. They were frustrated and felt trapped in theircurrent situation. So what is a frustrated income propertyowner to do? After a lot of research and roadblocks, I foundthe perfect solution that has changed the lives of myclients and took away stress to bring enjoyment of life.
For anyone who is tired of being a landlord and who owns arental/commercial property that has gone up a lot in value,take heart.A 1031 exchange into a Tenant In Common Property may be youranswer.
There are very specific rules to follow set by the IRS, andthe entire detailed process is the subject for a futurearticle, but here's the gist: 1-Sell your current incomeproperty; 2-Before the close of escrow, you declare via a QualifiedIntermediary (also called an Accommodator, who is aqualified third party) that you intend to do a 1031 exchangeinto a Tenant in Common Property; 3-Work with a reputablecompany to identify a property that you would like topurchase an interest in; 4-At the close of escrow, yourproceeds are transferred by the Accommodator to purchaseyour proportionate share of a larger "A" rated commercialbuilding; 5-You may choose a business center, a medicaloffice building, or similar high-end property; and lastly, 6-You get a deeded interest in this property, so you cankeep it, resell it, pass it to your heirs, or even gift itto charity upon your death.
The way that this works is all the new fractional owners, or"Tenants in Common" hire an ace Management Company to handleall the property management tasks. The company finds andkeeps high quality tenants, does the maintenance andupgrades, pays the property taxes, and handles all the dayto day crisis that arise. Probably the three most importantfactors in this entire process are: 1-Your choice of companythat offers the properties for sale; 2-the Accommodator,and; 3-the management company.
Make sure each of the three parts is a top notch with proventrack records. Anything less could spell disaster.
When this 1031 option is done properly, your benefits willbe:Deferral of all Capital Gains,A monthly contractual income (usually based on 6-7% returnon equity),Building depreciation for tax savings,Unlimited property appreciation potential, andNo more headaches of property management.
Good-bye Tenants, Trash and Toilets!Hello Tahiti!
-by Paula Straub
(c)Paula Straub - All Rights reserved http://www.savegainstax.com
===========================================================
Wouldn't you rather go to Tahiti?Are you a landlord with rental property whose value hassignificantly appreciated?Are you ready to cash in those profits and take that trip toTahiti?
Before selling your property, check with your accountant whowill tell you that you will be paying $60,000 in CapitalGains Tax to Uncle Sam. Your accountant will also tell youthat adding another $20,000 to your income by that sale iscalled recaptured depreciation. This will bump you into thenext tax bracket and doom you next April 15th into sendingthe IRS a check for maybe another $7,000.
Are you still ready to sell that property?It looks like that trip to Tahiti is going to be sometime inthe far future…
But wait! You decide to check with your realtor and thenfind out about a 1031 exchange to defer your Capital Gains. Your realtor tells you if you buy another like-kind rentalproperty of equal or greater value, you won't get hit withthe gains tax on the sale. That is all fine and good, butit does not really get you out of the headaches associatedwith collecting rent, keeping your unit occupied, findingclean/classy tenants that won't trash the place, nor does itkeep you from getting that 2am call to fix an overflowingtoilet. To top this off, now you have to pay more inproperty taxes and must charge higher rent.
Hmm…maybe this idea is not the ticket to that South Pacificparadise either.
This is the dilemma I heard from my financial clients againand again. They were frustrated and felt trapped in theircurrent situation. So what is a frustrated income propertyowner to do? After a lot of research and roadblocks, I foundthe perfect solution that has changed the lives of myclients and took away stress to bring enjoyment of life.
For anyone who is tired of being a landlord and who owns arental/commercial property that has gone up a lot in value,take heart.A 1031 exchange into a Tenant In Common Property may be youranswer.
There are very specific rules to follow set by the IRS, andthe entire detailed process is the subject for a futurearticle, but here's the gist: 1-Sell your current incomeproperty; 2-Before the close of escrow, you declare via a QualifiedIntermediary (also called an Accommodator, who is aqualified third party) that you intend to do a 1031 exchangeinto a Tenant in Common Property; 3-Work with a reputablecompany to identify a property that you would like topurchase an interest in; 4-At the close of escrow, yourproceeds are transferred by the Accommodator to purchaseyour proportionate share of a larger "A" rated commercialbuilding; 5-You may choose a business center, a medicaloffice building, or similar high-end property; and lastly, 6-You get a deeded interest in this property, so you cankeep it, resell it, pass it to your heirs, or even gift itto charity upon your death.
The way that this works is all the new fractional owners, or"Tenants in Common" hire an ace Management Company to handleall the property management tasks. The company finds andkeeps high quality tenants, does the maintenance andupgrades, pays the property taxes, and handles all the dayto day crisis that arise. Probably the three most importantfactors in this entire process are: 1-Your choice of companythat offers the properties for sale; 2-the Accommodator,and; 3-the management company.
Make sure each of the three parts is a top notch with proventrack records. Anything less could spell disaster.
When this 1031 option is done properly, your benefits willbe:Deferral of all Capital Gains,A monthly contractual income (usually based on 6-7% returnon equity),Building depreciation for tax savings,Unlimited property appreciation potential, andNo more headaches of property management.
Good-bye Tenants, Trash and Toilets!Hello Tahiti!
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