Defer Capital Gains Tax Tax-deferring option not without downside By Dick Hogan Published on May 8, 2005 People who want to move their real estate money around without paying capital gains taxes have a new, increasingly popular option — but real estate experts are split on how advantageous it is. It's called being a "tenant in common," meaning that you're part of a group of people who own a piece of real estate. Under rules set out by the Internal Revenue Service in 2002, an investor can sell his existing property and invest in a TIC project without paying the capital gains tax. Otherwise, the investor has to choose a particular piece of property and buy it himself to avoid the tax. Doug Johnston, chief executive officer of SCI Real Estate Investments with headquarters in Los Angeles, said the TIC investments his company sells are a good deal for a lot of people. "The average investor has a wife and kids, soccer games. It's more than the average person has time to do" to buy a new piece of property and then deal with the day-to-day responsibilities of managing it or hiring someone to do that, he said. SCI, which is opening an office in Fort Myers by late summer, offers a better alternative by buying a building and selling TIC shares in it, Johnston said. "Anyone who's owned a commercial property for the better part of a year is eligible." But not everyone thinks investing in a TIC — with or without the capital gains tax issue — is a good thing. "I think they are a bad idea," said Brian Tunnell, managing broker/regional director for Coldwell Banker Commercial NRT in Southwest Florida. "I've been advising people for some time to pay Uncle Sam the 15 percent. It doesn't take long for a bad deal to eat up 15 percent." Also, he noted, buying a TIC or other real estate investment only defers paying the capital gains tax rather than eliminating the need to pay it altogether. Sooner or later, the investor probably will have to pay. "We don't know what the capital gains rate will be in two years" and it could well be higher in the future compared to the historically low 15 percent it is now, Tunnell said. "If you have $2 million taxable gain, write your check for $300,000 and be patient while you look for the right place to put your investment." He also questioned how easy it would be to sell a TIC interest if the need arose to do so quickly. Tim Snodgrass, president of Argus Realty in San Juan Capistrano, Calif., and president of the Tenant in Common Association in Sacramento, Calif., acknowledged that it might not be possible to sell quickly. "A fractional ownership in a TIC is not a liquid investment," he said. "You need lender approval for the new buyer and you have to go through a closing and do everything you generally do. But it's not to be sold as a liquid investment, it's buying real estate. It's a five- to 10-year hold." Also, he said, it allows a small investor to buy into a building such as a large shopping center that would be out of reach as a straight purchase. TICs started in California and still are more prevalent on the West Coast, although interest is growing in the East, he said. They're also growing in popularity overall, he said: an estimated $4 billion this year compared to only $200 million in 1998.