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Risks and Benefits of a 1031 Exchange
Benefits
1. Asset Diversification: Tenants-in-Common investments may provide
an investor the ability to own properties in multiple markets, assets classes, and
size.
2. Institutional Quality Properties: Investors may be able
to own an interest in properties that would have been too expensive to purchase
individually.
3. Non-Recourse Financing: Many properties owned through
TIC have non-recourse financing.
4. Elimination of Day-to Day Property Management: Many TIC
properties allow the investor to own properties for which a third-party management
company will run all of the day-to-day operations for a management fee.
5. Income-Producing Properties: Any cash flow from properties
is generally paid to the TIC investor on a monthly basis. On most properties a portion
of this income is tax-deferred because of the depreciation and interest deductions.
6. Access to National Real Estate Investment Companies:
Many national real estate companies purchase, manage, and arrange financing on behalf
of individual investors who wish to participate in TIC investments.
7. Potential for Capital Appreciation: Real estate investments
generally have the potential for capital appreciation.
8. Potential for Tax Deferral of Capital Gains and Depreciation:
Any investments in investment properties that qualify under current tax laws for
a 1031 exchange may help you defer capital gains and recapture the depreciation.
Potential Risks
1. Principal Losses: TIC or any investment in real estate
is exposed to a possible loss of investment principal due to market fluctuations.
2. Illiquidity of Real Estate: TIC investments in real estate
are illiquid and may not have a secondary market available for resale.
3. Future Capital Requirements: Some TIC properties may
require future investment from owners.
4. Fractional Ownership: When owning property with other
owners you may need a majority vote of your co-owners and sometimes a 100% majority
to sell or make changes.
5. Cost: Cost may be higher than owning properties on your
own due to paying a third party management and acquisition company.
6. Tax Law Risk: Although current tax law is favorable to
1031 exchanges, future regulations can change this situation.
7. Suitability: Most TIC investments are Reg-D offerings
and may not be suitable for all 1031 investors. You must be an accredited investor
to purchase a Reg-D offering.
8. Loss of Management Control: You may not be in control
of the day-to-day management decisions on a TIC property.
9. Potential of Foreclosure: All real estate investments
which use leverage have the potential of foreclosure.
10. Potential Liability: All real estate may have some potential
liability in ownership of property.
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