Mention the words "investment property owners," and what might come to mind are mom and pop landlords who own a rental property or two. They may have come to enjoy the steady income their investment produces, but they also might be exhausted from all their maintenance and management responsibilities. However, they have other ownership options, such as the Tenancy-In-Common (TIC) and Delaware Statutory Trusts (DST) structures, if suitable.

TICs and DSTs have been increasingly popular transaction options for real estate owners since the IRS recognized them as complying with 1031 exchange requirements. Each allows owners to defer capital gains taxes upon the sale of investment property. TICs and DSTs allow for fractional ownership and accommodate multiple participants, meaning the minimum investment may be lower than traditional direct investment property ownership.

When considering a TIC or DST investment, it is essential to know what they are and how they operate.

Tenancy-In-Common

The TIC investment structure increased in popularity when it received a favorable ruling from the IRS in the early 2000s (Revenue Procedure 2002-22) that it qualifies as a like-kind property for 1031 exchange transactions. The TIC affords real estate ownership to you and up to 34 other co-investors. You and your co-investors might own different percentages of the property; for example, you could own 35%, while one of your co-owners owns 10%, and so on. You receive a proportional percentage of the rent collected from the tenant or tenants.

In a TIC, you and your co-investors each receive a deed. Each investor closes individually on their investment, and if the TIC is structured with debt, each investor is responsible for securing their financing.

With a TIC investment, you and your co-owners have certain rights and responsibilities in making decisions about the real estate you own, including property improvements and maintenance. A well-crafted TIC agreement is essential in helping define owner responsibilities to avoid any disputes that could occur among the ownership group.

Under the TIC arrangement, securing a loan or refinancing an existing one is the responsibility of each co-investors. This generally requires individual credit checks and the submission of individual financial statements.

With a TIC investment, it is important to understand the financial health of your co-owners because any liabilities that could occur (a potential bankruptcy or individual loan default) might need to be a shared responsibility of the remaining co-owners. On the other hand, the TIC structure that enables individual property ownership affords investors certain tax advantages not available with other structures.

Delaware Statutory Trusts

DSTs also received an IRS ruling in 2004 (Revenue Ruling 2004-86), recognizing this investment structure as like-kind replacement property for 1031 exchanges. The DST allows multiple investors to participate- up to 499 – but those investors do not directly own the real estate. Instead, the trust owns the property. As a DST investor, you own shares of the trust as a beneficiary. You receive a percentage of potential cash flow from rental payments collected from tenants and potentially an appreciation on your investment when the trust sells the property or properties.

The DST requires only one deed per property, which the sponsor or trustee secures. The trust handles property acquisition, financing and management, and maintenance of the property throughout the life of the DST.

As a DST beneficiary, you and your fellow investors assign the trust's sponsor or trustee decision-making responsibilities. That entity handles all property ownership and management issues, such as repairs, tenant issues, leases, acquisitions, and dispositions.

Financing with a DST is the responsibility of the sponsor or trustee. The trust is responsible for meeting the loan obligations, and any financing is considered non-recourse to investors.

With a DST, the sponsor assumes responsibility for leasing, loan commitments, and legal issues that could arise, and ultimately the trust's performance. While DST investors may not be personally liable as property owners, they have no voting or decision-making rights in how the property is managed.

The Choice is Yours

As mentioned, TICs and DSTs remain popular options for real estate investors, especially those using the 1031 exchange for their transactions. There are advantages and limitations to each. That is why it is important to conduct your due diligence on a TIC or DST investment to help determine if either approach meets your investment objectives and goals.

Whichever approach you are considering for real estate investment property ownership, we encourage you to consult with our team at Bangerter Financial 916.965.1879, as well as your tax advisor, to help ensure you have a complete picture of the opportunity.