Tax law offers niche for Realtors

It took a tax law to bring real estate and securities brokers together, though securities law is what’s keeping them–at least some of them–at arm’s length.

The unlikely “pairing” of securities and real estate professionals is common in 1031 TIC tax-deferred exchanges, in which property owners sell property, such as a rental home or apartment building, in exchange for a share in the passive ownership of a larger property, such as a shopping mall or office park.

The real estate community is expressing a growing interest in these transactions, which inherently require the sale and repurchase of property. While real estate agents play an integral role in the transactions, federal law prevents commission-sharing and other types of fee arrangements between securities brokers and real estate brokers.

Most professionals working in the TIC-exchange industry would agree that under federal securities law, most–if not all–TIC exchanges are considered to be securities, not real estate transactions. That means only licensed securities brokers should be authorized to arrange these transactions, the experts say.

The “1031” in these transactions refers to Internal Revenue Code 1031, which offers a tax shelter for these types of transactions, and “TIC” refers to the common owners of a property. Property owners often choose to participate in these transactions for tax reasons, as they offer a capital gains exemption, and also because they provide a more passive role in property ownership. TIC exchanges also offer a source of income, and proponents say the rate of return can range from 12 percent to 15 percent in some cases.