Real estate investment for residual or passive income works this way: The real estate owner sells sole ownership in a smaller property and exchanges it for fractional ownership of institutional-quality real estate that would be out of reach for most individual investors. If the investor structures the sale and subsequent TIC purchase in accordance with Section 1031 of the Internal Revenue Code, capital gains taxes may be deferred on the property sold. The advantages to this are two-fold: the investor is able to relinquish day-to-day management of the property and still receive a monthly income.

When structured properly, TIC investments allow investors to comply with Section 1031 of the Internal Revenue Code, which says a property owner can defer capital gains tax on a sale by exchanging property for a “like-kind” replacement property. The owner must identify the replacement property within 45 days of selling the original (“relinquished”) property, and must close on the purchase within 180 days of selling the relinquished property. Experts advise anyone interested in a 1031 exchange to research their options well before the sale so they are prepared to meet the requirement of identifying the new (a.k.a. replacement property) property, which could very well be a TIC property, within 45 days of closing.

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