Potential Risks of 1031 TICs*
1031 TIC Investment Risks
As with any investment, 1031 exchanges and TICs have certain risks:
- Fees and Expenses. The cost to acquire a TIC interest may be more than purchasing a property outright because of additional expenses of making the property available to multiple co-owners and marketing it in the form of a private securities offering, including brokerage fees, which may outweigh the benefits of tax deferral.
- Past Performance. Past performance does not ensure or indicate future earnings, and property appreciation is not guaranteed. Principal reduction or loss may occur depending on the performance of the underlying real estate.
- Tax Status. The 1031 exchange program through a TIC is a structured investment based on Rev-Proc 2002-22; current applicable laws may not remain in effect. If laws are changed, or if the IRS determines that the requirements of Section 1031 have not been met, there is a possibility of other ramifications such as back pay under different tax provisions, and immediate tax liabilities, including tax penalties.
- Real Estate Risks. TIC interests are direct investments in real estate and are subject to all risks of owning, operating and disposing of real estate. Results from investing in real estate vary through cyclical economic times.
- Reliance Upon Others. An investor purchasing TIC interests relies upon the sponsor and property manager to make day-to-day decisions related to the property. Other decisions may require unanimous approval from co-tenants.
- Illiquidity. A TIC interest is an investment in real estate, subject to a tenants-in-common agreement, and is an illiquid investment. There is currently no established secondary market for the resale of TIC interests.
- Suitability. TIC investments may not be suitable for all 1031 exchange investors.
*Obviously, it is not realistic to identify all of the potential advantages or risks that an individual investor may encounter in a particular 1031 TIC.