I NEED clients, and the professionals that work with them. Accountants, lawyers, insurance agents, and financial planners are the people that tell us what we need to know.
There are several ways that investment property should make money for you every year. Cash flow, appreciation, and depreciation allow you to add to your net worth every year. Cash flow should pay all expenses and overhead plus give you a 5% or more return on your investment every year. Rent obsolescence is when you can no longer raise the rents to keep up with increasing costs of insurance, property taxes, etc. Appreciation should mean that the property is worth more every year. When appreciation is less than the rate of inflation you actually have less net worth. Depreciation allows a tax deduction that lowers your taxes every year till the property is fully depreciated. After about ten years you will be getting about 50% less of a tax benefit than if the tax basis of the property were current.
The professionals like your accountant will recognize the propensity for these events to occur. I can recommend a professional to review your situation if needed. Refinancing might allow you to update the tax basis of the property. The IRS Rule 1031 would allow you to defer capital gains, vacate a neighborhood in atrophy, reinvest in an area on the rise, and increase the depreciation deduction.
Tenant-in-common (TIC) programs provide a way to keep money invested in real estate without the stresses of being a landlord.
Billions of dollars have been invested in TICs since 2002, when the IRS cleared up the status of Section 1031 exchanges, which allow investors 45 days to choose a new property to invest the revenue from the sale of another property in order to avoid capital gains tax.
Each property can have up to 35 investors, most of whom would not be able to own a building of this magnitude otherwise. Omni Brokerage says $7.2 billion worth of TIC properties were sold to investors by sponsors last year, which is greater than the total value ($7 billion) sold between 2001 and 2004.
The amount sold already this year ($7.7 billion) has passed the 2005 total, thanks to a good deal of investments being made independent of 1031 exchanges.
Often, TICs are sold as securities, and are required to include a private placement disclosure about the property, such as what the sponsor paid for it, the sponsor's share of profits, how much selling commissions are, and any potential risks involved.
However, those sold as private real estate transactions are not subject to SEC regulations, and often include disclaimers protecting brokers from any liability.
TICs are a better fit for some investors than for others. Those who feel the need for hands-on control should look elsewhere, according to Gary Gorman, a managing partner with 1031 Exchange Experts, an intermediary for 1031 exchanges.
Source: New York Times, Vivian Marino (10/17/06)
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