Real estate investment fraud: what investors need to know about TICs and 1031 exchanges

Bradd Milove | Miller & Milove

Real estate investment fraud puts unsuspecting owners at risk.

By Bradd Milove

Seasoned real estate investors familiar with the tax benefits of 1031 exchanges have been exposed to a host of fraudulent investment practices in recent years. Under Section 1031 of the Internal Revenue Code, the capital gains tax on real estate is deferred provided that profits are reinvested in qualifying investments within 180 days of closing. Tenant In Common, or “TIC” investment scams in real estate proliferated since 2002 after the Internal Revenue Service ruled that TICs qualify for tax deferral treatment under section 1031.

A TIC is a real estate investment in which two or more parties own a piece, or “fractional interest,” in a particular property. TIC investments gained popularity in 2002 after the Internal Revenue Service ruled that these investments qualified for deferred taxation under Section 1031 of the tax code. In the years that followed, the collapse of real estate markets across the country exposed fraud and deception in connection with TIC investments – and according to The Washington Post, a thorough round of “legal housekeeping” is an important step in securing investments for the future.

Investors should keep in mind that TIC investments are securities that are subject to all federal and state rules and regulations. Investment advisors, securities brokers, financial planners and other TIC sellers must disclose all material facts relating to these complex investments; however, many TICs were sold to investors through false and misleading means. TIC investment documents frequently hyped market conditions, misrepresented terms of existing leases and financing arrangements and exaggerated the track record and experience of the property managers. Indeed, TIC abuse has caused regulators (including the SEC and FINRA) to issue additional warnings to brokers concerning their disclosure and due diligence obligations.

Popular motivation for TIC fraud arose in response to the declining real estate market. As home prices began to crumble, sharp property owners sought a quick exit strategy from profitable real estate investments by unloading the properties on unwary investors; and by preparing false and misleading TIC investments, and marketing those investments through national brokerage firms, financial planners and investment hawkers, they succeeded in handing properties off to unsuspecting investors – who then found themselves stuck with the consequences of a binding agreement

On the surface, TIC investments are attractive to retired real estate investors seeking relief from the hassle of day-to-day property management. Under the terms of a TIC arrangement, professional real estate investors would no longer be concerned with fixing toilets, collecting rent and dealing with problem tenants. Instead, TICs offer professional management – and a reliance on expert property managers that attract many seeking a peaceful and profitable retirement investment.  While professional and independent management is a key selling point in TIC offering documents, the experience of certain property managers and terms of their compensation is sometimes misrepresented.

Protect your investments with expert securities legal advice

Damages arising from TIC fraud are not limited to the dollars invested in the TIC. Indeed, failed TIC investments cause losses in multiple ways. The dollars invested are lost.  Mortgages must be repaid and the tax liabilities from the deferred 1031 exchanges may come due.  For retired real estate investors in particular the consequences of a failed TIC can be devastating.

As real estate losses mount, investors may question whether losses are attributable to market conditions or to other causes. Under the circumstances, a review of TIC and real estate investment offering documents is a prudent, preemptive step for anyone looking to verify and protect their investments. With over 25 years of experience representing clients in real estate fraud and related disputes, San Diego’s Investment Attorneys are highly qualified to offer potential and current investors honest advice and counsel as they navigate the complex arena of TIC investments. To learn more, visit us online:

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Posted by Social Media Staff on Sep 15, 2011. Filed under Bradd Milove, Columns, Sponsored Columns. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

1 Comment for “Real estate investment fraud: what investors need to know about TICs and 1031 exchanges”

  1. TICs and mortgage securities were sold to investors through false and misleading means because the government agencies were lax. It is prudent to have an investment attorney to check the documents before real estate investors make an investment decision.

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