News
The Cal State
Companies: Center for Real Estate
Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership
Media Contact: The Center for RE Studies For: Immediate Release
Discover a Vehicle
to Invest in Real Estate Using Little of Your Own Money
How can you invest in real estate
using little of your own money? In this
article, you will discover an amazing way of gathering investors that won’t break
your bank.
Calstatecompanies introduces a
relatively unknown form of ownership to effectively gather active investors. It
is called tenants-in-common (TIC). It’s
an easy, low-cost method of funding real estate investments while maintaining tax
benefits.
OWNERSHIP
FEATURES THAT PROVIDE FLEXIBILITY
Tenants-in-common is a form of ownership that may involve two
or more people, and it does not require a marital relationship. With a tenants-in-common
ownership:
1. There can be two or more co-owners,
but their ownership interests need not be equal. For example, if three people
are co-owners, one could have a share of 25 percent, another 30 percent, and
the third 45 percent.
2. There is no automatic right of
survivorship. Unlike joint tenancy, a share in the property held by one owner
does not automatically pass to the other owners at death. When a tenants-in-common
owner dies, that owner’s interest is transferred to his or her heirs and not to
the other tenants-in-common, unless there’s an agreement giving title to the
co-owners.
3. Interest held by tenants-in-common
may be sold separately by individual owners. In many cases, when
tenants-in-common first acquire the property, they agree to give the other
co-owners a “first right of refusal” to buy out one another.
WAYS
TO SAVE WITH A TENANTS-IN-COMMONOWNERSHIP
Here are seven advantages of the tenants-in-common ownership
over other entities:
1. Low set-up costs: Compared to
other forms of ownership, tenants-in-common has one of the lowest set-up costs.
You don’t need an attorney to prepare offering circulars or registration with
governmental agencies. In fact, all that is required is to have the names of
the owners recorded when the transaction closes. A formal document is not necessary,
though we would recommend one. Accounting fees for preparing partnership, trusts,
and corporation returns are eliminated as well as state and federal income
taxes.
2. Low down payment: In some public
offerings, restrictions are imposed on the use of leverage. Using the tenants-in-common
form of ownership, there are none. This is an important investment strategy in purchasing
and selling midsize apartment complexes. The lower the down payment, the more
leverage, and the more property you can control.
3. Active voice in management: An
important investment goal is to reduce taxes. The tenants-in-common form of
ownership does this by allowing an active voice in management.
Tenants-in-common owners, with the help of qualified consultants, are extremely
effective in making the right decisions. The old adage “two heads are better than
one” hits the bull’s-eye, especially when these heads are concentrating on becoming
wealthy.
4. Ease of transferability: Unlike
a certification of ownership in a partnership, the tenants-in-common ownership
has a greater degree of transferability. Each owner’s name is on the deed and is
recorded. An owner’s interest can be sold, hypothecated, willed, or transferred
without the consent of the other co-owners, and each owner has complete control
of his or her interest. In evaluating collateral, lenders generally give more
credence to an interest in a recorded tenants-in-common interest than in a
limited partnership.
5. Economy of scale: Because
investment dollars are being accumulated by a group, there are more dollars
available to purchase larger properties. Many individual investors don’t have
the opportunity to use the economies of scale unless they form a group. How
does this concept apply? If one unit is vacant in a four-unit complex, you have
25 percent vacancies. On the other hand, if one unit is vacant in a
40-unitcomplex, the vacancies would be 2.5 percent.
Just think about it! When the
carpet layer is called, to whom do you think the better square-foot price will
be given, the owner of the 40-unit building or the four-unit building? The same
applies to all vendors.
6. No mortgage or qualifying
restrictions: Unlike most public limited partnerships, tenants-in-common
ownership doesn’t have any restrictions for financing or investor
qualifications. Financing can be structured to give the greatest flexibility to
each individual owner either at the time of purchase or sale. The group is
formed based on the needs and desires of its members not on standards imposed by
governmental agencies. Individual owners don’t need a minimum or maximum net worth
to invest. They’re not required to have someone attest to their capability of
making their own investment decisions. Nor are they forced to have experts make
these decisions for them.
7. Tax advantages: Using the
tenants-in-common form of ownership, gives you the opportunity to become an
active investor. As such, you can qualify for the $25,000 per year write-off
against your salary, dividends, interest, and other income. This form of ownership
provides the flexibility needed to implement the tax-saving strategies
discussed earlier. Other forms of ownership satisfying only passive investor
requirements do not have these capabilities.
8. Neither a real estate nor a
securities license is required to form a private tenants-in-common group to
invest in real estate. If you do not manage or control the group, it doesn’t
have to be registered or qualified with any governmental agency as a security.
TAX
IMPACT OF TENANTS-IN-COMMON OWNERSHIP
Deferred income on recognition of taxable gain when selling
rental property (the Internal Revenue code section 1031) mandates that the tenant-in-common
co-ownership must meet these four requirements:
1. To form a tenants-in-common
group, each of the co-owners must hold interest as tenants-in-common. No one
can previously have held interest in the property in any other legal entity
(for example partnership).
2. The allocation of income and
expenses as well as liability for blanket and encumbrance shall be in accordance
with the co-owner’s percentage interest and ownership interest.
3. All of the co-owners of the
entity must have the right to vote on all issues of the ownership. An owner or
sponsor or manager may advance funds to cover payments due from another co-owner.
This debt must be paid within 31 days.
4. There is an exit requirement
that each co-owner retains a right to transfer, petition, or encumber their
ownership interest.
New
Guidelines for Tenants-in-Common Interest
Procedure 2022-22 provides guidelines in the use of fractional
interest in the replacement properties in the 1031 exchange. The key criteria
are:
1. The number of tenants-in-common
cannot exceed 35.
2. The sponsor of interest may own
the property or an interest there for only 6 months before 100 percent of the
interest can be sold.
3. Any decision having a material
impact on the property, owners must be approved unanimously by the owners.
4. The management agreement must be
renewed annually and must provide for market rate compensation.
SUMMARY
There are definite advantages to group ownership. Probably
the most prevalent is economy of scale. The tenants-in-common form of ownership
provides a simple, low-cost way for investors to form groups, while maintaining
many tax benefits.
ABOUT THE AUTHOR: Eugene E. Vollucci,
is considered to be one of the foremost authorities on real estate taxation and
investing and has authored books in these fields published by John Wiley &
Sons of New York. He is the Director of the Center for RE Studies, a real
estate research organization and President of calstatecompanies. To learn more
about the Center, please visit our web site at http://www.calstatecompanies.com
