In spite of their advantages, 1031 exchanges can be troublesome. Foster says the requirement that replacement property must be identified within 45 days of the sale is probably the biggest reason the exchanges fail. "It sends a lot of people scurrying and pushes them into bad deals," she says. But even the IRS can't change that-it's a statutory requirement that Congress would have to change, she notes.

Advisor Gary N. Greenbaum, president of Greenbaum and Orecchio Inc. in Old Tappan, N.J., finds the exchanges don't work for most of his clients, although he's been involved in at least a dozen in the last three years. "The good news is not that big-it's only the investment earnings on the tax payable on the deferred capital gains," he says.

That has to be compared with the price you must pay to earn that money, he continues. The costs can add up from lawyers, intermediaries and advisors. "And this is the biggest one: The rush to comply with the 45 days and the 180 days to close. They are so burdensome and onerous that they make 1031 exchanges questionable at best and burdensome in reality because what it forces you to do is accept properties that are not always the best choices."

A New Choice For Real Estate Investors

Sponsored Tenancy In Common (TIC) arrangements might appeal to clients who want to do 1031 exchanges but don't want to actively manage real estate any longer.

The Internal Revenue Service has long maintained that like-kind exchanges of interests in partnerships, REITs or other business entities-which often are set up to hold real estate and are more passive investments-don't qualify for capital gains tax deferral under Section 1031.

However, real estate owned by tenants in common does qualify, and now some companies have packaged ownership of multi-million dollar, triple-net-leased commercial properties into tenant-in-common units of as little as $50,000. Triple-net-leased properties often are rented to national companies with good credit that are responsible for paying all expenses, including property taxes, maintenance, utilities and so on. As a result, investors can get a steady stream of rental income without having to actively manage the property.

Last year the IRS issued Revenue Procedure 2002-22, which specifies the conditions that must be met for it to issue a private-letter ruling saying a TIC is an undivided fractional interest in a rental property and not an interest in a business entity, such as a limited partnership. Many observers say they expect the announcement to accelerate the trend of using TICs as replacement property in 1031 exchanges.

For the IRS to consider issuing a ruling, 15 conditions must be met. Among them:

o Each co-owner must hold title to the property.

o The number of co-owners must be no more than 35 people.