DBSI denied the charges and said it would vigorously defend against them.
Most commonly, Chastain says, TIC interests are sold as part of the (Securities Act of 1933) Regulation D private placement offerings. "We don't have a problem with them selling them this way," she says. "The company we named [DBSI] was not selling it through securities channels, but purely as real estate transactions. The people were buying not only a TIC interest in the property, but they also were hiring DBSI or one of their affiliates to manage the property. Investors didn't really have any management responsibility."
Meanwhile, with the nation's real estate collapse, interest in tenant-in-common 1031 exchanges has waned, and some sponsors have closed or consolidated. Tenant-in-common deals peaked in 2006, when $3.659 billion in equity was raised, according to OMNI Real Estate Services, Salt Lake City. As of January 22, available equity in these deals stood at just $174.7 million.
"For a 1031 exchange to make sense, you have to have land selling and [capital] gains deferred," says Renee Brown, president of the board of directors of the 700-member Indianapolis-based Real Estate Investment Securities Association (REISA). "Properties no longer sold. It was a figment of pricing and a credit market freeze-up."
REISA, formerly the "Tenant-in-Common Association," expects to double its membership of 700 by year-end, according to Brown. That's because real estate funds, limited liability companies and publicly registered non-traded REITs are picking up steam in an undervalued real estate market.
When tenant-in-common 1031 exchanges peaked, the rallying cry was, "Swap 'til you drop," chuckles Andrew Rosenberg, a Coral Springs, Fla., attorney and CFP. Rosenberg, who still handles TIC deals, notes this referred to the fact that investors could swap investment properties until they dropped dead. When a property owner died, IRS rules stepped up the "basis," or original value of the property plus any improvements, to the market value on the date of the owner's death. Unfortunately, that "step-up" basis rule died for the 2010 tax year.
Assume a property, purchased ten years earlier for $2 million, had no improvements and was valued, upon an owner's death, at $5 million.
In 2009, heirs would owe no capital gains tax if they sold it the day after the owner's death.
In 2010, under the same scenario, a non-spousal heir would have $1.7 million in taxable capital gains. That's because that same property would owe capital gains tax based on the dead property owner's original $2 million purchase price, plus another $1.3 million. A spouse could add $4.3 million to the original purchase price.
You add those amounts to the deceased's original purchase price, and subtract them from the $5 million value upon the property's sale to get the taxable capital gain.