More Return On Equity For Your Investment Property Dollar

							by: Cary Losson

Few would deny that real estate is a solid investment. It provides an attractive combination of
stability, reliable cash flow, preservation of principal and capital appreciation. However, many
investment property owners nearing retirement find themselves in a quandary. They are equity
rich, but cash poor, with increases in the value of their property far outpacing income growth.
They also are often tied down by the day-to-day issues of property management and, particularly
in cities like San Francisco, California, shackled to the constraints of rent (and eviction) control.
In fact, San Francisco is home to some of the lowest cash return on equity in the state's real
estate marketplace, which is somewhat counter- intuitive given California's ever-booming
property market.

The obvious answer is to sell the property and unleash the dormant equity, but that can be
problematic. These investors face the reality of prohibitive capital gains taxes and recaptured
depreciation, as well as the task of identifying an alternate investment venue; or locating,
acquiring and financing suitable replacement property in the time period allowed, taking
advantage of tax deferral under IRS code section 1031.

An ideal solution for many investment property owners may be to reinvest the proceeds from the
sale of their property and utilize a subsequent 1031 exchange into a tenancy- in-common (TIC)
ownership type, also known as co-ownership of real estate (CORE) interest in a suitable
replacement property.

1031 exchanges, also known as Starker exchanges or tax-deferred exchanges, permit owners to
sell investment property and defer tax payments by reinvesting the proceeds into another
investment property (or investment properties). In order to completely defer the payment of tax,
among other things, the replacement property must be of equal or greater value and all the equity
from the sold property must be reinvested in the new property. The marriage of 1031 exchange
and TIC/CORE allows investors not only to defer their capital gains taxes but also to upgrade
their investment real estate.

TIC/CORE is a way of sharing ownership of property among two or more persons whereby each
tenant holds an undivided interest in the property. Tenants- in-common may own interests of
differing sizes. TIC/CORE investors are on the title and considered separate owners of the real
estate. They share pro rata in the income, tax benefits and appreciation of the property. Their
TIC/CORE interest can be purchased, sold, gifted, bequeathed by will or inherited; and it is
subject to property taxes, gift tax, and estate and inheritance taxes in the same manner as any
property held in sole ownership. With a TIC/CORE property, each of up to thirty-five investors
have the opportunity to own an undivided fractional ownership interest in an investment-grade
property, such as an office building, shopping mall, apartment complex or industrial property,
costing anywhere from $10 million to $150-plus million.

The benefits of investing in TIC/CORE properties are substantial. Such properties employ
professional asset and property management, relieving the investor of day-to-day tenant
headaches. More important, investors often receive greater cash flow and overall returns than
they had in their previous sole ownership property. Typ ically, many people receive between 2-3
percent of their equity in their property in rental income. By selling this property and placing the
equity into a larger investment-grade property, they can potentially experience annualized cash
flow from 6-8 percent, paid monthly, and 12-16 percent overall return on their investment. Also
compelling is that TIC/CORE exchange investors can diversify among several property types,
and geographic locations through fractionalized ownership, while still enjoying 1031 exc hange
benefits on each amount. Thus, investors can potentially reduce risk in their overall real estate
portfolio.

Investors seeking to exchange for a TIC/CORE property are best advised to work with a
financial advisor experienced in 1031 exchanges. Such advisors work closely with top real estate
providers, who give the investor access to the best properties available. In addition, many
TIC/CORE opportunities have pre-arranged, non-recourse financing in place, which is perfect
for investors working within the 1031 exchange time frame. Numerous hours of upfront
investigation, evaluation, due diligence and life cycle planning transpires before a property is
offered to an investor group. Investors faced with only a 45-day window to identify a suitable
replacement property to complete a 1031 exchange can select a suitable project with confidence.

Given the tax deferral, institutional- grade quality of the property, professional property
management and pre-arranged, non-recourse financing aspects, a 1031 exchange replacement
property structured as tenancy- in-common ownership can be a very wise and profitable solution.
It allows the investor to maintain everything they like about real estate (monthly income,
preservation of principal, capital appreciation, etc.), while eliminating most of the hassles of
property ownership.

(c) 2005, 1031 Exchange Options. Reprint rights granted so long as the article and by- line are
reprinted intact and all links made live. This article is neither an offer to sell nor an offer to b uy
real estate or securities. There are material risks associated with the ownership of real estate. You
must be an accredited investor. Securities offered through Sigma Financial Corporation, Member
NASD/SIPC.

This article was posted on November 28, 2005