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Pitfalls
to Avoid in Group Ownership of 1031 Exchange Property
Two
years ago the IRS
issued guidelines for taxpayers who wish to buy
a small slice of a large property. Their ruling
covers groups that are put together by promoters,
or "sponsors" and is intended to cover groups comprised
of people who don't know each other. These groups
are known as "Tenants-In-Common", or "T.I.C.s" and
most often called "TICs" (rhymes with "sticks")
in the real estate industry.
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by
Gary Gorman
Founding Partner,
The 1031 Exchange Experts |
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The
ruling sets out the minimum requirements that must
be met before the IRS will accept an application
for a group's exemption from the partnership rules.
Being subject to the IRS's partnership rules would
be fatal for a TIC.
Since
this ruling was released, the TIC industry has exploded
and is easily the fastest growing segment of the
real estate industry.
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As
appeared in... |
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A quick search for "tenants in common" on Google
as I write this article produced over 471,000
hits. Allowing for duplicates, etc., this means
that there are a couple of hundred thousand web
sites trying to market TIC properties. Pretty
amazing when you learn that only one group has
applied for approval of their transaction (or
so the IRS tells us -- they have approved only
one and claim they have denied none).
While
these transactions can be very beneficial to some
investors, we advise our clients to approach them
very carefully. We continually observe cautious,
conservative investors getting carried away by
a slick marketing brochure.
Remember
that the IRS guidelines are the minimum that are
required to get a ruling.
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We've seen some really awful programs, that
don't even come close to meeting the minimums,
being aggressively marketed as being blessed
by the IRS since they meet most
of the requirements, or "the major requirements"
of the ruling.
We've
seen some really greedy promoters pushing
really bad properties through some very
beautiful advertising pieces. Our advice
to our clients is to approach these investments
with great care: do your due diligence.
Ask yourself this question "If this is such
a great investment, why do they need me
to invest in it?". Make sure that you know
exactly what compensation the sponsor is
going to receive by putting the deal together.
There is nothing wrong with making a profit,
but not by gouging trusting and unsophisticated
people. |
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