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Sprockets 11-04-2007 04:42 AM

1031 Tenants in Common Arrangements
I have a client selling some real estate and we are looking at using a TIC property as the replacement. With several members here involved in real estate and securities, I thought I would get some different views. One issue that I am not concerned about is the commissions these arrangements pay to brokers. I am a fee-based advisor, and the TIC sponsors will allocate the unpaid commission to my client and I will charge them a fee directly (much lower than the commission). It seems like a reasonable way to go where the owner does not want to participate in the management of the property.

JALICHTY 11-04-2007 09:17 AM

Re: 1031 Tenants in Common Arrangements

I am a CPA, as you are aware, and I am not a great big fan of TICs. My feeling is that these are merely partnerships that have been disguised as a real estate management program to satisfy the requirements of Sec. 1031. A person who sells real estate cannot defer the tax on that real estate sale by investing in a partnership, specifically excluded by Sec. 1031 and I believe that's exactly what these are. I look at these as the tax shelters of the 1980's, looked good, saved tax and had minimal economic substance. However, they are a big force in the country right now and apparently continuing to grow. As far as the commission, my only concern would be if your client were to get charged twice for the same product, notwithstanding the probability that the promoter has probably purchased the property from a related party for an inflated price in order to pander to those members of our society who don't want to pay taxes today if they can wait until later.

Sprockets 11-04-2007 10:03 AM

Re: 1031 Tenants in Common Arrangements

Thanks for chiming in. From what I can tell, IRS has condoned these, although I have not read the case law. As a fellow CPA, I am also concerned about clients purchasing these properties at inflated prices. The property we are looking at is a free standing Gander Mountain store. I was able to trace the purchase price to determine how much profit is built into the deal. From what I have seen, there is a wide variety of profit spreads in these, and some not doing adequate due diligence (i.e. commissions blur their vision) may not be getting a reasonable deal. In my opinion, local commercial properties are also inflated due to the amount of 1031 money in the marketplace. In my client's situation, the effective tax rate on the property being sold is 32%. The calculation is complex due to a built-in gains tax issue, and the original property sold had very little basis (value $9 million, basis $350K) so there is a lot of tax on the table.

If I can charge a client 1% on a $1 million deal and save them $50K, along with doing appropriate due diligence, I think everyone can win. I am just not 100% comfortable with the product yet.

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