Risks of TIC Investment for 1031 Exchange
Tenants in Common
Tenants in Common Risks
As with any investment, there are potential risks of Tenants in Common investments for a 1031 Exchange.
While Tenants in Common investments have many advantages, like any real estate investment, are not without risks and are not for every investor.
As a real estate investor it is important to review the potential TIC benefits as well as potential risks prior to investing.
1031 EXCHANGE
TENANTS IN COMMON RESOURCES
Disadvantages of Tenants in Common
Potential risks associated with Tenants in Common (TIC) investments include:
Illiquidity
A Tenants-in-Common interest is an illiquid investment and there is no current active secondary market for selling your interest.
Sponsor Performance
While Tenancy in Common owners have voting rights on major activities such as leasing, sales and refinance, there is dependence on the performance of the sponsor.
Additional Expenses
Fees and Expenses of each offering should be carefully evaluated. Multiple owner offerings typically have additional expenses to owning real estate on your own and these fees should be weighed against specific capital gains tax liability. All investors are encouraged to have their tax and legal counsel advise them on taxes including any federal and state capital gains taxes, depreciation recapture and the recent 3.8% Medicare tax which could be applicable.
Tax Status
Tenants in Common (TIC) are structured according the Revenue Procedure 2002-22. Corcapa and DAI Securities, LLC typically work with sponsors and properties that have “should” level tax opinions regarding 1031 exchange tax compliance but its possible the IRS would rule unfavorably on a TIC offering and this could result in back taxes and immediate tax liability.
Conflicts of Interest
Conflicts of interest may affect a Tenants in Common investment and should be evaluated.
Past Performance
Past performance of investments is not indicative of future performance and doesn’t ensure earnings or appreciation. Principal loss or reduction could occur based on real estate performance and market conditions.
Potential for Property Value Loss
All real estate investments have the potential to lose value during the life of the investment.
Potential for Foreclosure
All financed real estate investments have the potential for foreclosure.
Reduction or Elimination of Monthly Cash Flow Distributions
Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is a potential for suspension of cash flow.
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