3 Mistakes To Absolutely Avoid In A 1031/TIC Exchange
BATTLECALL GUEST EXPERT:
Paula Straub, Financial Advisor And Mortgage Originator
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!
Before I let you in on the secrets, let me briefly
explain 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!
Got an opinion? We want to hear from you. Post your thoughts or comments here in our Mortgage Warrior Forum. Come join the conversation and say hello...onward mortgage warrior!
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