1031 Exchange Arranged by Brit Properties as Tenancy in Common
Despite the pandemic, industrial real estate remains strong and investors are struggling to find acquisition opportunities in the sizzling hot market. That makes it difficult to buy industrial property to defer capital gains and depreciation through the popular 1031 Exchange process. Here’s the challenge: unless a replacement property is formally identified to the IRS within exactly 45 days—the opportunity to defer income taxes is gone forever. That’s a bitter pill to swallow.
The 1031 name is derived from the IRS Code Section 1031 which allows a property seller to reinvest the sale proceeds with a postponement of income tax exposure, possibly far into the future. In real estate investment circles this is a well known method of preserving a large portion of a family’s wealth.
“The rules are very specific, and you must follow them to the letter,” says Joel Friedland, partner at Rosemont, Illinois based industrial property syndicator, Brit Properties. He adds, “otherwise, you have to pay the income taxes to Uncle Sam, period.” Rules for 1031 Exchanges require a buyer of a partial interest to be structured as a tenant in common, also known as a TIC.
Since 1989, Friedland has syndicated 90 industrial property partnerships including 300 investors and their families. Back in 2002, one of those investors was Jack Heiman, the founder of a Chicago based toy manufacturing company. Heiman needed a 1031 Exchange to redeploy proceeds from the sale of an income producing property. Friedland arranged his first 1031 Exchange by selling Heiman a 50% TIC at 718 Industrial Drive in Elmhurst, for $800,000, based on a $1.6 million property valuation.
Recently, Friedland marked the completion of his 40th 1031 Exchange by selling 50% ownership of a fully leased property, located at 4242 Bryn Mawr on Chicago’s far northwest side. The buyers, a Chicago based family, agreed to acquire a TIC interest for $1.5 million, based on a $3 million property valuation.
Friedland feels good about accommodating TIC buyers’ income tax deferral requirements. It helps some of his investors defer income taxes but also allows some of Brit Properties’ long term investors to take some “investment-chips” off the table at a fair price for both sides.
Friedland says he is currently working on two new TIC deals that should be completed before the end of the year. He says “the TIC buyers are looking to close this year, before a potential tax law change that the new administration is considering. Friedland says, “unfortunately, the Biden team might try to reduce or eliminate the benefits of a 1031 Exchange starting next year.”