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Tenancy-in-Common (TIC) allows two or more persons to have an undivided, fractional interest in a property asset. The progression and growth of TICs has been both stunted and helped by the US government. Namely, when TIC owners wanted to sell their property, they were taxed heavily. But the advent of Revenue Procedure 2002-22 by the IRS in 2002 changed the face of TICs. Revenue Procedure 2002-22 qualifies a TIC for a 1031 Exchange, a section of the tax code allowing investors to exchange "like-kind" property. Since the previous and replacement properties are considered "like-kind" properties, investors are not taxed on their capital gains. With the TIC and 1031 Exchange, SCI Real Estate Investment CPM and regional manager Paul White said real estate could be converted into an annuity-type income that is a great vehicle for passing real estate wealth on to children.

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The idea seems simple: Pool money together, and purchase a bigger and better piece of the proverbial pie.

Such a simple idea in the form of a property ownership arrangement-tenancy-incommon-has resulted in great rewards for many property owners.

Tenancy-in-Common (TIC) allows two or more persons to have an undivided, fractional interest in a property asset. Ownership shares do not have to be equal, and beneficiaries can inherit the interests. Owners receive their proportional share of income, tax benefits and the property's appreciation.

"It allows small investors to acquire an interest in an institutional quality asset that is professionally managed on their behalf," said Christian Mirner, executive vice president of real estate for 1031 Exchange Options in California. "Being able to segue from sole ownership and defer the taxes and acquire a generally higher quality, institutional, more high-profile asset is a very logical progression for a real estate investor."

The progression and growth of TICs has been both stunted and helped by the U.S. government. Initially, the Internal Revenue Service recognized a TIC as a partnership, meaning all tax rules applied. Namely, when TIC owners wanted to sell their property, they were taxed heavily.

But the advent of Revenue Procedure 2002-22 by the IRS in 2002 changed the face of TICs, said Paul White, CPM, and regional manager for SCI Real Estate Investment in Miami.

"It's how the industry got kicked off: Now it makes sense to take the risk," he said. "Now we understand what we need to do to prevent the IRS from coming in and saying you're a partnership."

2002-22 qualifies a TIC for a 1031 Exchange, a section of the tax code allowing investors to exchange "likekind" property. Basically, investors can buy and sell property without being taxed on their returns.

"The government wants to tax you, but as long as you change from likekind property, they wont," said Eric Odum, president of Navigar Advisors, an independent TlC advisory, clearing through GunnAllen Financial Inc., in Tampa, Fla.

Odum said the 1031 Exchange allows investors to defer capital gains taxes that would arise from the sale of real estate. A successful TIC Exchange results in the investor being able to use 100 percent of the proceeds from the sale to purchase another investment property. Odum said the dissolution of the 1031 Exchange would have a catastrophic effect on the small-end market for investors.

"You'd have to pay taxes every time you sold a property," he said.

The minimum investment for a TiC is $100,000, but Odum said investing between $350,000 and $500,000 provides the best shot at a good deal. A high-end TIC property will be a Class A property featuring an investment-grade tenant with a B-plus or better on the Standard & Poor rating.

"It's like the difference between a mom-and-pop tire company and Goodyear Tires," Odum said.

Most TIC properties are held for four to ten years before investors sell. According to the 1031 Exchange, a replacement property-the new property being acquired by the investormust be located within 45 days. The 45-day period begins with the close of escrow of the previous property.

Since the previous and replacement properties are considered "like-kind" properties, investors are not taxed on their capital gains. With the tax risk gone, Mirner said the volume of TIC business has increased each year.

"It's become a notable force in the overall real estate market," he said. "TICs are competing with trusts, institutional investors and opportunity funds for the gamete of real estate products that are traded across the country on an annual basis."

While property owners are benefiting from TICs, the arrangements are also presenting advantages for property managers, Odum said.

"It creates another vehicle and another whole set of individuals to manage," he said. "There's a whole new set of players."

White, of SCI, said larger TICs will source out the day-today activities, like the leasing and asset management to local companies: TICs need qualified people to handle that, he said.

"It's more cost-effective to find the best in that market," he said. "It boosts CPMs."

Since TICs sometimes involve investors spread all over the country, hiring a local property manager to conduct local business on behalf of the co-ownership group makes sense, Mirner said. His company has business dealings in California, Tennessee, Georgia, Illinois and Nevada.

"Wherever there's potential opportunity and attention is being paid by institutional investors, those are markets where you'll see co-ownership groups acquiring assets," he said.

Dealing with and communicating with up to 35 co-owners is a major struggle for many property managers working with TIC investors, Odum said.

"It's not a simple ownership where you have one owner," Odum said. "So with major issues, you're essentially dealing with multiple owners and that can create a challenge."

But the challenge is necessary in the TIC arena.

"From the IRS standpoint, co-owners need to be involved at the real estate level in order to maintain the integrity of likekind property for 1031 Exchange," Miner said.

From an economic standpoint, the growing real estate market will create a steady and growing flow of cash, and TICs will keep its profits circulating thanks to the 1031 Exchange.

"In a social context, there's an aging baby boomer population that's trying to figure out how to pass their wealth on to the next generation," Mirner said. "If they sold it outright, there would be a large tax liability that would negatively impact their net worth."

But with the TIC and 1031 Exchange, White said real estate could be converted into an annuity-type income that is a "great vehicle for passing real estate wealth on to children."

More pie anyone?