Syndication and taxes

10 Replies

Hey Guys,

Quick few questions

1 If I invest in a real estate syndication as a limited partner and I was given bonus depreciation year one where I had a $70,000 loss on 100k investment at the time of sale how are the gains calculated taking into consideration depreciation recapture (say 8% Pref yearly).

2. if there is evidence of any capital gains can I use a new syndication investment (not a 1031) in another real estate syndication that also gives me a bonus depreciation/losses that same year to offset those Capitol gains?

1. If I understand your Question correctly upon a sale there will be a recapture of depreciation. The GP will have thier CPA prep K1 that will show catch-up and where you are at.

2. You will need to speak to GP about doing a 1031.see below link as will done via DST or TIC

https://andysirkin.com/investm...

@Roni Elias thanks for your answer.

By way of clarification, the second part of my question was about ways to avoid capitol gains at the time of sale of a syndication.  I am not interested in QOZ funds.  It is my understanding that if I buy in to a new syndication as an LP in the year of sale of a prior syndication I can use the losses that may be given (as bonus depreciation) from the new syndication to offset capitol gains from the syndication that is being sold that same year.  Is this correct?

Originally posted by @Duke Giordano :

@Roni Elias thanks for your answer.

By way of clarification, the second part of my question was about ways to avoid capitol gains at the time of sale of a syndication.  I am not interested in QOZ funds.  It is my understanding that if I buy in to a new syndication as an LP in the year of sale of a prior syndication I can use the losses that may be given (as bonus depreciation) from the new syndication to offset capitol gains from the syndication that is being sold that same year.  Is this correct?

This is not tax or legal advise. When the asset is sold a depreciation recapture/catch up has to occur so the loose are recaptured. Then after you sell asset you can do 1031 via tenants in common or DST. Then continue to rinse and repeat.

It would depend on your personal tax situation. For the most part you are correct that the new depreciation may offset some or all of the gain from your sale, but it may or may not cover all of it, and depending on your tax classification, it may not work. The best way to ensure that you aren't paying the tax man in the year of sale is a 1031; but not always easy as an LP in a syndication.

Originally posted by @Duke Giordano :

@Roni Elias thanks for your answer.

By way of clarification, the second part of my question was about ways to avoid capitol gains at the time of sale of a syndication. I am not interested in QOZ funds. It is my understanding that if I buy in to a new syndication as an LP in the year of sale of a prior syndication I can use the losses that may be given (as bonus depreciation) from the new syndication to offset capitol gains from the syndication that is being sold that same year. Is this correct?

I am not an accountant and defer to anyone who is. Having said that: no, this is generally incorrect. Typically you are going to have to pay your capital gains because doing a 1031 exchange is not as simple as just buying something new and saying to the IRS that that now applies to something that you just sold. There is a specific process that has to be followed that includes going through an intermediary, etc., a certain legal structure that has to be followed in the investment, and all this generally involves additional time and expense as well.

Most syndications are not set up to be able to handle this (i.e. DST or TIC), although there are a small minority that are. If this is important to you you should inquire with the sponsor to find out for sure in the specific situation.

 

I think he is asking if Depreciation from a new deal can offset CapGains from a Just sold deal. Note a 1031 is normally NOT available to an LP in a syndication.

I also would like to know.  I thought it was YES, but recently saw something about different types of gains (1249, 1250, 1251 or something like that).

Charles LeMaire

Yes you are right Charles, thanks for simplifying the question.  Can Depreciation losses from one new deal offset the Capitol gains from a just sold deal that same year?  I realize I cannot do a 1031 if the syndication is not set up for that from the start, mainly just a question as to try to avoid capitol gains at the year of a sale. (without using a QOZ fund)

@Duke Giordano seek out an accounting firm that has real estate specialists and engage them.

in 2018 we sold a syndication deal for a tidy gain. Several investors re-invested funds into another syndication of ours that same year. They "reinvested" proceeds without the use of a 1031 yet they still paid no cap gains taxes. the new losses effectively covered over the gains.

Big disclaimer: this is was one scenario. results can vary. if you're going to play in the big leagues you'll need a big league advisory team on your side. :)

You need a knowledgeable CPA to look at your situation and provide you guidance. This situation can be treated differently if you qualify and file as a real estate professional vs a non real estate professional. A good CPA will save you more than their fees!

Note I am not a tax professional and this is not tax advice :)

Glad you're thinking about depreciation recapture. A lot of people I meet don't know that this exists! If there's bonus depreciation, then there are items we recognized as being non-real estate, and therefore we cannot exchange them for real estate in the 1031, so there is a possibility for depreciation recapture, and that would be at your ordinary income tax rate (25% deprecation recapture for real estate). But if you're rolling the proceeds into another property, you'll like create enough losses to offset the depreciation recapture. Passive losses in the year of the sale will also offset capital gains and depreciation recapture.