A TICA or Tenants In Common Association is a form of 1031 exchange that is related to real estate properties. All investors in a TICA must be tenants-in-common, which means that all of the co-owners own equal percentage shares of the property they are purchasing.
A TICA allows you to exchange one piece of realty for another when you sell it and like many other types of 1031 exchanges, the new property has to be equal or more than what you initially invested (unless you can add cash into the deal too).
TICAs differ from other 1031 exchanges in several respects:
the TICA confines ownership interests to specified members; each tenant in common in a TICA holds his or her designated fractional interest in trust for him or herself and also as a trustee on behalf of the other designated tenants in common.
TICAs are also somewhat similar to Limited Liability Companies (LLCs), but share some key differences, specifically:
- 1) TICs have members while LLCs have owners and
- 2) LLCs have centralized management while TICs usually do not have a governing body that would be responsible for the day-to-day decisions about what happens with the property.
Once you find a new property to buy with your exchanged funds from the TICA, you will personally own it 100%. Since there is no governing body for a TICA association, you can make all of your own rules for this portion of your investment portfolio. You can choose to rent it out, sell it for a profit, rent it to friends or family, or anything else you want.
Because there are no designated governing bodies in a TICA association, the co-owners are responsible for all upkeep and maintenance of the property themselves. If one owner fails to keep up with this responsibility by ignoring issues that would typically need attention (such as lack of repairs), then that individual can be held personally liable for any damages that occur because of their negligence. The last thing you would want to do is be stuck trying to figure out how to get out of a 1031 exchange. However, this risk is minimized because the co-owners do not have to worry about legal compliance like they would if they were running an official business since everyone owns equal percentages.
Since 1031 exchanges work on the basis of delayed taxes, you can defer paying capital gains tax on the original sale of your property as long as you reinvest it within 180 days. If capital gains tax is due, then you will need to pay that before you can convert the funds into new investments (unless it’s part of a like-kind real estate exchange).
Since there are no governing bodies for TICAs, they are not recorded with any county or state office.
Instead, all information about them is privately recorded between members and their lawyers. This means that no one else will know what your new property looks like or how it’s being used, but this also means that you do run some risk of breaking laws by not reporting your activity to the proper authorities.
Since 1031 exchanges work delayed taxes, you have up to 180 days after you sell your initial property to find a new one that qualifies under the rules of a 1031 tax deferral. You can’t just go out and buy any piece of real estate that you want with this money- it must be related to investing in an income producing property such as commercial, industrial, retail or multifamily residential units. If you purchase property with 1031 funds and later try to change its use, then the IRS will consider it taxable immediately since you no longer meet their requirements for deferred taxes on this part of your portfolio.
When selling a property through a TICA, a seller cannot finance more than 80% of the value of what’s being bought (this is down from 90% recently).
This means that if you are selling for $100,000 in order to buy the new property within 180 days, then you will need at least $80,000 of capital gains from your sale plus closing costs. This requirement is meant to minimize risk associated with 1031 exchanges by minimizing leverage. Even though some TICA associations do allow for mortgages between members, there are strict rules about how much leverage can be used.
1031 exchanges have some restrictions on what kind of real estate they work with. For example, commercial properties are usually too expensive or too illiquid for most investors to take advantage of using 1031 deferrals so it’s best to stick only with residential units when using this strategy.
One of greatest benefits of a TIC Association is the high degree of privacy you get from it.
Your property will be held in a trust with other investors, and no one can identify who owns each piece except for the title company that holds legal documents until the sale goes through. This means that your family, friends and neighbors won’t know about your new property and you don’t have to worry about showing it off or explaining what you’ve bought.
There are some disadvantages to TICAs as well, such as the fact that they cannot be recorded anywhere because there is not governing body to oversee them.
This means if anyone should ever need to look up information on any individual properties within a TICA association (such as foreclosure), then they must go through all legal records individually since none of them will be available anywhere else.
Another disadvantage of a TICA is the fact that you will have to deal with a title company going through all legal processes of closing on your new property, which can take up to 30 days.
In addition, if there are any problems during this process then delays could run up to 90 days or more, depending on how fast your lawyer can get things moving.
In conclusion, TICA associations have many benefits and disadvantages just like every other investment strategy out there. Although they’re not for everyone, a lot of people find that having a private group helps them save time and money so they can invest in the real estate market even when their funds may not normally allow it. If you’re looking for something a lot less cumbersome and still offers great returns with high liquidity, check out this 1031 Exchange Fund Service.
There are other steps that need to be taken before you fully understand everything about a California TICA 1031 exchange, which is why it’s important to contact an accountant or tax professional in order to understand how they work and what all of this entails.
This article provides only general information about how a TICA 1031 exchange program functions. It is not exhaustive nor should it be considered advice on any particular matter. The author explicitly disclaims liability for damages incurred by relying on these contents or related materials from third parties. Always seek the help of a qualified legal, accounting, real estate professional and/or such related professionals when dealing with specific legal or financial issues.