Best Vehicle to invest in a syndicate syndication K-1

19 Replies

A good CPA is going to have the best advice. Our investors do it from different types. Some are individual, LLCs, retirement accounts, money market accounts, etc. I believe the tax advantages will be mostly similar among all of them. I would focus more on finding a good group to invest with personally. I personally invest out of my llc.

If you invest in a syndication as an individual that is organized as an LLC, and you are a limited partner (LP) the stake you are taking in the LLC is already its' own measure of asset protection since you are limited from most forms of liability tied to the LLC. (hence the term 'limited' partner). Ensure to verify this verbiage limiting your liability is in your PPM prior to signing/funding.

Investing out of your own LLC into a syndication LLC, in addition to an additional layer of asset protection, can also provide some anonymity. If you're higher up the NW scale, this isn't a bad idea.

If you're just starting out, nothing wrong with investing as an individual LP into the syndication LLC, no need to use an entity to invest out of. You can get a personal liability umbrella rider from your auto insurer if your concern is liability.(at least that's how we can get personal liability umbrellas in Michigan).

@DongHui Patel

There are obviously several ways to invest into a syndication. As far as tax benefits go, a self-directed IRA or Solo 401k would hold a clear advantage. It is important to understand however that those investments would grow your retirement money rather than your money personally. If you have retirement funds and are looking for better returns with that money, investing in a syndication with a self-directed account might be a wise move. Many of our clients invest into alternative assets both inside and outside of their retirement accounts. I second the suggestion to work with a knowledgable CPA or investment advisor when making these decisions.

Depends where the money is but I'd be inclined to just invest in your personal name or a trust (I would not set up one just for this purpose). As an LP, your liability is limited to the amount of capital you put in. 

Also depends on your tax situation: i.e. if you're a real estate professional with a high earning income/spouse with a high income (and still REP status), it'd make more sense to invest as an individual. The reason this is is because the syndication usually does a cost segregation in year 1 and accelerating the depreciation forward and you would be able to deduct the losses from the syndication. 

If you're not a real estate professional, then you could offset the passive gains you may have from other businesses with the passive losses from the syndication. 

If you don't have any of the above situations, the losses would still roll from year to year. 

Also - depends too on the states they're investing in too and if you want to potentially file in those states and increase the complexity of your return. 

A good accountant should be able to help you out with all of this. 

As others have said, if you are investing in a syndication you will be an LP member of an LLC so you already have some liability protection. If you have an LLC that you can invest out of that adds maybe more protection and possibly some anonymity.

Regarding taxes, however, I think a typical multifamily, self-storage or mobile home park syndication would perform much better outside of a qualified retirement account.  Those accounts are already tax sheltered and you don't get the benefit of depreciation and cost segregation in your retirement accounts.  If you do it right, you can defer or offset most or all of your tax from a syndication.  By putting that syndication in a qualified account, you lose out on a major benefit of real estate investing.

I have a self directed 401k and I typically use it for private lending, note investing, life settlements and other opportunities that don't have tax benefits like depreciation.  That said, if I don't have capital available outside of my retirement accounts, I would consider investing in a real estate syndication with my qualified money rather than putting it in the stock market or other paper assets.

Agreed. There is zero additional liability benefit to investing via an LLC as you are already a Limited Partner in the Syndication. Maybe anonymity benefit if you setup the LLC properly.

As a syndication sponsor I see lot of investors using their self directed IRAs.  Not the most tax efficient but works if that's where your money is and you're looking to diversify.   I believe @DongHui Patel mentioned having a Solo401k.  That's much better than an SDIRA.  

I agree with @Richard Neuharth about focusing your time on finding quality sponsors ... yes I'm biased :)

This really depends on your tax situation and the syndication strategy. A long term buy and hold, may make a lot of sense to invest using 401k/SDIRA funds. If the investment is taking large depreciation up front and you need and can use the write off, then investing in your LLC or personal name would make a lot of sense.

As for a single member LLC vs personal vs trust. I don't know that there is much of a difference. Of course consult your attorney and CPA.

It's worth discussing your individual scenario with your CPA but in most syndications in doesn't matter how you register your investment, in regard to liability. Taking an LP position protects you from any of the liability (generally). The investors we have in our syndications are about 50-50 in investing under their personal name and investing using an LLC. If you have the ability to self direct retirement funds into a syndication that is always a good method to use too.

When investing as a limited partner I echo much of the information previously mentioned. The syndication LLC offers liability protection on its own. If you want additional anonymity or possibly asset protection protecting your limited partner investments from your day job (Ex. Physician) then a personal LLC may be in order to invest through. Many who do this have a revocable trust of ones family to avoid probate then own the interest in the LLC thats investing in syndications. It can get complicated, so worth getting some professional advice on this.

@DongHui Patel

Most syndications are organized as LLC's or LP's.
You will likely be a non-managing member in an LLC or a Limited Partners in Limited Partnership.
Your investment is likely already limited to your capital contribution.

Investing through another entity that offers liability protection might not give you added protection.

Speak to an attorney.

You've received good advice already in this thread.

The one thing I'll comment on is that some funds and syndicated assets limit the SDIRA intake for capital because it is perceived that they'll be transformed to fiduciaries for the capital by exceeding the stated threshold.  Thus in pursuit of tax benefits you may be crowding out some investment opportunities from more seasoned sponsors who are full on their subscriptions with this tax-advantaged vehicle.  

From a liability standpoint provided you're planning to invest passively then you're going to have liability limited to your contribution for almost all opportunities presented.  The anonymity may have utility for you, but aside from that I don't think it is going to provide additional outside liability protection.  

Given that the liability protection really isn't relevant the basic choice is the tax benefit of investing via a self-directed retirement vehicle versus the limitation of investment opportunities with making this choice.  If you find projects that are good enough to invest outside of a tax-advantaged structure AND they're full on this type of subscription you could always choose to invest in those opportunities individually.  The goal should be maximal after-tax gains; NOT minimal taxes.  This is, of course, net of perceived risk and in line with your overall investment portfolio.  This also assumes you're not mixing the capital with your labor and are remaining completely passive.  

I suggest that using a retirement account has some disadvantages: consider taxes, depreciation (passive loss), tax rates.

If you use an IRA and invest in a property that has a loan on it, you are subject to UDFI (sometimes confused with UBIT). Many syndications don't pay off the loan, so the tax will apply (yes, the IRA is subject to tax! Even if it is a Roth!). A Solo 401K avoid this tax.

In non-Roth retirement accounts, you will move what would have been Cap Gain to regular income in the future when you distribute (RMDs!).  Yes, a Roth will avoid this.

In all retirement accounts, you will forgo the depreciation (passive losses).  These can be used to offset income.*  Roth may win here, but that income offset is sort of nice.

* Before everyone piles on about RE Pro (yes, that is one way to do the offsets), realize that at the disposition of an asset, Cap Gain unlock passive losses to be used against all income. 

Regards,

Charles LeMaire

Originally posted by @Charles LeMaire :

I suggest that using a retirement account has some disadvantages: consider taxes, depreciation (passive loss), tax rates.

If you use an IRA and invest in a property that has a loan on it, you are subject to UDFI (sometimes confused with UBIT). Many syndications don't pay off the loan, so the tax will apply (yes, the IRA is subject to tax! Even if it is a Roth!). A Solo 401K avoid this tax.

In non-Roth retirement accounts, you will move what would have been Cap Gain to regular income in the future when you distribute (RMDs!).  Yes, a Roth will avoid this.

In all retirement accounts, you will forgo the depreciation (passive losses).  These can be used to offset income.*  Roth may win here, but that income offset is sort of nice.

* Before everyone piles on about RE Pro (yes, that is one way to do the offsets), realize that at the disposition of an asset, Cap Gain unlock passive losses to be used against all income. 

Regards,

Charles LeMaire

 Good points Charles, however dosent the depreciation just get recaptured at disposition? so its a net-0 effect? 

Yes, and no!  And this is just my opinion!  One can use the passive loss to push taxes into the future.  This is clearly what the RE Pro wants, but it is also possible for a serial passive to take advantage of this.  Talk to your CPA about using "passive losses at the disposition of an asset".  For instance, this year, my passive losses will allow me to do larger Roth conversions and stay in the lower tax brackets; note the rates are a bit better now than after 2025. 

@Charles LeMaire . As a real estate professional who is kicking a lot of taxes down the road, I think about what you said often. You are probably aware of the reset basis on capital gains at death, which is part of the current tax code. It works great for repeated 1031 exchanges.  I wonder if that strategy works with all of the taxes not paid real estate professional as well? 

@Paul Moore - Hey Paul, Great Question!  But to be clear, I am not a RE Pro, just a serial passive investor.  And certainly not a CPA!  My understanding, not that it matters, of current law is that if you own it at death the basis is reset. This method of tax avoidance does have the side effect of you being DEAD!  

And one would owe estate tax on any end value above the exemption (I believe this reverts back to a lower number in a few years), so not terribly unlikely. Estate planning good!

As I am not a RE Pro, I depend on the disposition of an asset rule to help.  This also kicks the taxes down the road, but later is thought to be better than now.  And I hope to be able to move to a point that apparent income is minimal and some of the cap-gains will be taxed at 0.  As those pent-up taxes come due, I hope to be at lower rates.  

Charles

Echoing the comments of others. Most do through individual, and plenty of tax advantages already mentioned, in addition to what's becoming more and more of a trend, which is rolling proceeds from one deal to the next, ie a 1031exchange. A lot of our investors are starting to do this now, and it's my personal plan to do so, as well. That also means sticking with syndicators through a few investment cycles, highlighting the need to do proper due diligence on deals. And as @Charles LeMaire said, your cpa can help you create something akin to a bond laddering strategy over time. 

Great thoughts shared on this thread. In addition what's been shared, when you invest as an individual in limited partnership that is set up as a fund, the structure should be such that each property is acquired by the partnership with a single purpose LLC. That way each property has its own separate books and records, its own insurance, its own bank accounts, resulting in no legal exposure to the other properties, nor co-mingling of funds between properties. That adds both another layer of protection for investors beyond the limited partnership, and also allows individual property performance to be accurate and transparent. It also creates simplicity when the time comes to sell a single property out of the portfolio.