More Return On Equity For Your Investment
Property Dollar
Few would deny that real estate
is a solid investment. It provides an attractive combination of stability,
reliable cash flow, preservation of principal and capital appreciation.
However, many investment property owners nearing retirement find themselves
in a quandary. They are equity rich, but cash poor, with increases in the
value of their property far outpacing income growth. They also are often
tied down by the day-to-day issues of property management and, particularly
in cities like San Francisco, California, shackled to the constraints of
rent (and eviction) control. In fact, San Francisco is home to some of
the lowest cash return on equity in the state's real estate marketplace,
which is somewhat counter-intuitive given California's ever-booming property
market.
The obvious answer is to sell
the property and unleash the dormant equity, but that can be problematic.
These investors face the reality of prohibitive capital gains taxes and
recaptured depreciation, as well as the task of identifying an alternate
investment venue; or locating, acquiring and financing suitable replacement
property in the time period allowed, taking advantage of tax deferral under
IRS code section 1031.
An ideal solution for many
investment property owners may be to reinvest the proceeds from the sale
of their property and utilize a subsequent 1031 exchange into a tenancy-in-common
(TIC) ownership type, also known as co-ownership of real estate (CORE)
interest in a suitable replacement property.
1031 exchanges, also known
as Starker exchanges or tax-deferred exchanges, permit owners to sell investment
property and defer tax payments by reinvesting the proceeds into another
investment property (or investment properties). In order to completely
defer the payment of tax, among other things, the replacement property
must be of equal or greater value and all the equity from the sold property
must be reinvested in the new property. The marriage of 1031 exchange and
TIC/CORE allows investors not only to defer their capital gains taxes but
also to upgrade their investment real estate.
TIC/CORE is a way of sharing
ownership of property among two or more persons whereby each tenant holds
an undivided interest in the property. Tenants-in-common may own interests
of differing sizes. TIC/CORE investors are on the title and considered
separate owners of the real estate. They share pro rata in the income,
tax benefits and appreciation of the property. Their TIC/CORE interest
can be purchased, sold, gifted, bequeathed by will or inherited; and it
is subject to property taxes, gift tax, and estate and inheritance taxes
in the same manner as any property held in sole ownership. With a TIC/CORE
property, each of up to thirty-five investors have the opportunity to own
an undivided fractional ownership interest in an investment-grade property,
such as an office building, shopping mall, apartment complex or industrial
property, costing anywhere from $10 million to $150-plus million.
The benefits of investing in
TIC/CORE properties are substantial. Such properties employ professional
asset and property management, relieving the investor of day-to-day tenant
headaches. More important, investors often receive greater cash flow and
overall returns than they had in their previous sole ownership property.
Typically, many people receive between 2-3 percent of their equity in their
property in rental income. By selling this property and placing the equity
into a larger investment-grade property, they can potentially experience
annualized cash flow from 6-8 percent, paid monthly, and 12-16 percent
overall return on their investment. Also compelling is that TIC/CORE exchange
investors can diversify among several property types, and geographic locations
through fractionalized ownership, while still enjoying 1031 exchange benefits
on each amount. Thus, investors can potentially reduce risk in their overall
real estate portfolio.
Investors seeking to exchange
for a TIC/CORE property are best advised to work with a financial advisor
experienced in 1031 exchanges. Such advisors work closely with top real
estate providers, who give the investor access to the best properties available.
In addition, many TIC/CORE opportunities have pre-arranged, non-recourse
financing in place, which is perfect for investors working within the 1031
exchange time frame. Numerous hours of upfront investigation, evaluation,
due diligence and life cycle planning transpires before a property is offered
to an investor group. Investors faced with only a 45-day window to identify
a suitable replacement property to complete a 1031 exchange can select
a suitable project with confidence.
Given the tax deferral, institutional-grade
quality of the property, professional property management and pre-arranged,
non-recourse financing aspects, a 1031 exchange replacement property structured
as tenancy-in-common ownership can be a very wise and profitable solution.
It allows the investor to maintain everything they like about real estate
(monthly income, preservation of principal, capital appreciation, etc.),
while eliminating most of the hassles of property ownership.
(c) 2005, 1031 Exchange Options.
Reprint rights granted so long as the article and by-line are reprinted
intact and all links made live. This article is neither an offer
to sell nor an offer to buy real estate or securities. There are material
risks associated with the ownership of real estate. You must be an accredited
investor. Securities offered through Sigma Financial Corporation, Member
NASD/SIPC.
Author-Bio: Cary Losson is
the Founder and President of www.1031exchangeoptions.com
1031 Exchange Options. A luminary
in the TIC/CORE 1031 exchange marketplace, Mr. Losson is frequently quoted
in journals and periodicals concerned with investment property issues and
advice.
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