1031Exchange - Tenants In Common
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Anyone know the good, the bad and ugly of the 1031 Tenants in Common Exchanges.
I have a client that has her CPA is recommending her to invest in one of these (yep he's lic'd too)with the proceeds of a building that she is selling to avoid the capital gains tax.
My client has put me in charge of whether she should do it or not.
My B/D says they're bad news that the fees are too high so we don't offer them.
Anyone have any comments they can share with me. Even though I can't offer them I do want to give her a fair assessment.
My broker dealer offers them.....send her to me. My commission is great on these .
There are a lot of firms that have selling agreements with these types of companies. Inland and Wells are two of the 1031 Reits that I deal with. The client gets to transfer proceeds from the sale of income property to other professionally managed income property and defer the capital gains. The client then gets an income stream from the management company (Inland or Wells) The minimum investment in these companies is 500K.
Questions to ask: I would definitely look into the quality of the company and real estate investments that her CPA is recommending. Size of the holdings, length of management experience, geographic areas, type of buildings. How can she get out if she wants to. Can she sell to the other tenants in common first or can she offer to other investors. If it is a small and unproven management company she should be aware that there are other more reliable ones available. I believe you have to series 7 to offer these. Is her CPA licensed or is he channeling this through another broker.
In any case she must not ever touch the money from the sale if she is planning to do a 1031 exchange. It must go through an approved intermediary/trustee with the pre stated intent of doing a 1031 exchange.
Wow, I am surprised to hear such a biased opinion from a B/D. We offer 1031 programs through our private REITs that we offer, such as Behringer Harvard, Wells, etc.
They are a little involved, and the client needs to be able to meet certain financial liquidity criteria. It's not like investing into a regular non publicly traded REIT (publicly traded actually trade on the NYSE, NASDAQ, etc) where you invest in a BASKET of properties. With a 1031, you must invest into a SINGLE property, allbiet partial ownership. For example (hypothetical), you could 1031 exchange $900,000 into a commercial property Wells has set aside for 1031's, and they have 21 million worth of it to assign. You don't go to their general portfolio, you go all into the one property.
Some of them have pretty nice dividends (rent payments), some of which you can depreciate with the underlying asset. However, there is the liquidity issue like all real estate, plus the fact it isn't TANGIBLE. If she really wants/needs to do a 1031, it isn't hard to set up. She just needs to do it prior to close of her existing property, and any decent title company can help set up the escrow account for the funds with a "qualified intermediary" aka a title lawyer. Then she has x amount of time to reinvest the money in real property locally or whatever.
Let me know if you need further info.
She can 1031 the proceeds into a Royalty Trust that is traded on the NYSE... She gets a fat dividend yield, she diversifies into other assets classes, you get some commish, and the assets under management...This is still a tricky area of IRS Law so have her CPA sign off on it...
Although he may nix the idea because he wasnt the one to come up with it...
LOL
Plus this post brings up the conflict of interest inherent in having the CPA be licensed and his suggesting a 1031 tenants in common exchange, which pays a very juicy commission on what I presume is a large amount of money.
While a 1031 can be the right thing for the client, the mere fact that the CPA stands to make 25K or better COULD sway his recommendation when there might be better options for the client.
TIC's & DST's are just great news for those of us that can do them!
Wire houses will catch up with the rest of us in a couple of years. To bad for you!
[quote=blarmston]
She can 1031 the proceeds into a Royalty Trust that is traded on the NYSE… She gets a fat dividend yield, she diversifies into other assets classes, you get some commish, and the assets under management…This is still a tricky area of IRS Law so have her CPA sign off on it…
Although he may nix the idea because he wasnt the one to come up with it...
[/quote]You sure about that Blarm? I don't think a publicly traded royalty trust qualifies as "like property" under section 1031.
I know of an FA in our office who did a couple of them… Again, there is some grey area under current tax law, and the client must basically, with the approval of his CPA and other advisors, insist on doing it… The FA receved the proceeds and invested in I believe Prudhoe Bay, or something like that…
[quote=joedabrkr] [quote=blarmston]
She can 1031 the proceeds into a Royalty Trust that is traded on the NYSE... She gets a fat dividend yield, she diversifies into other assets classes, you get some commish, and the assets under management...This is still a tricky area of IRS Law so have her CPA sign off on it...
Although he may nix the idea because he wasnt the one to come up with it...
[/quote]
You sure about that Blarm? I don't think a publicly traded royalty trust qualifies as "like property" under section 1031.
[/quote]
You are right it does not qualify! They are still in the white paper stages with the IRS and have not been tested! BIG RED FLAG.
TIC's and DST's have letter rulings TIC's in 2002 & DST's in 2004 I beleive but do not hold me to the exact date!