Taxes on multi-family syndication

Charit P. · 2023-09-22T18:34:24-07:00

Hoping someone with syndication and tax knowledge can answer my question. My first LP multi-family syndication deal sold for a profit in 2022. When I sum up the tax losses claimed during the first 2 years of the deal and the gains reported on my 2022 taxes (all from form 8582), the total is much larger than the actual cashflow + sale profits. My expectations were that the depreciation and other tax losses and gains should offset each other and at the end of the day the gains reported for taxes should equate the tangible gains that I received. This is not the case. Since this is my first syndication sale, I have no other frame of reference. I have a theory though …….. My CPA says that the profits and losses reported on the K1 are based on ownership share. When I look at the syndication’s PPM it seems the LPs own 100% of the venture with GPs owning none (some of my other syndications assign 70% ownership to LPs and 30% to GPs, matching the profit-sharing ratio). Is it possible that since GPs don’t have an ownership share, their 30% of the profit share is being reported as passed-through gains to the LPs? This would explain why my share of “theoretical” gains is larger than the actual cash received. Anyone else been in the same situation or know if it is possible that a syndication can be structured in such a way that the LPs bear all the tax burden?

David M.

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

2y

@Charit P.

maybe I shouldn't chime in because I haven't done a syndication, but figure accounting / taxes are taxes...

You do realize that when you sell the property, you have to pay back the depreciation generally at 25%, right? There is no free lunch with the irs. I see depreciation as "lemonade from lemons." This is where the 1031 "swap 'till you drop" comes into play.

In my layman's opinion, the 30% profit share to the GP is separate. This just looks like a nice split where the GP doesn't have an equity stake. They just are partaking in what whatever cashflow they can generate.

Good luck.

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Brian BurkePro Member

Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes

2y

What you are seeing is likely depreciation recapture. Look at the starting capital account balance on the K-1. If you invested $100K and the starting capital account balance is $25K, that means your depreciation losses likely exceeded income by $75K (there are nuances to this but this is the general idea).

So if you got $200K back at the sale, $100K is profit, $75K is recapture (taxable), and $25K is return of principal (non-taxable). There is also $75K or capital return but it’s in the recapture so it’s taxable.

I doubt that the LPs are getting taxed for the GP’s share. If that’s even legal it would be highly unusual.

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Arn CenedellaPro Member

Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes

2y

I imagine @Brian Burke is the correct.

The answer probably revolves around the large bonus depreciation due to cost segregation in year 1 of a syndication. Review of your K1 will provide the answer.

I would add since syndication losses are passive losses and most often can only be used to offset passive income - you may not have been able to use that loss year 1. If so that loss if carried forward to a time you can use it. If this occurred, you can use that loss carry forward to reduce the taxable gain from the sale the year after.

I would ask your CPA:

Was your basis in the investment reduced year one via depreciation?

If yes, then was that depreciation used to offset other income in year one or was it simply carried forward?

Get these questions answered and the mystery will be solved.

One final point, there are only three sources of passive income - rental real estate, royalties, or income from a business you own but don’t actively manage.

Most people don’t have much if any passive income, so if I had to guess you have a loss carry forward on your books.

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Basit SiddiqiBusiness Member

Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes

2y

This should equal if your investment in the syndication has ended

Distributions less Contributions = Taxable Income from investment(reported on the K-1's)

This is especially true since K-1's capital accounts are now reported on a 'tax basis'.

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Charit P.

OP

Member since 2021 · 5 posts · 0 votes

2y

Thanks everyone for you comments. I don’t think it’s depreciation recapture that accounts for the difference. Let me share the actual numbers to illustrate the situation better.

Initial investment in 2020 = $50,000

Cashflow + sale proceeds in 2022 = $40,465 ($90,465 including returned capital)

Following were the reported losses/gains on Form 8582 (captured from my CPA’s worksheets). These numbers are just for this asset, and not offset with other investment losses or gains.

2020: $22,600 (loss)

2021: $4,500 (loss)

2022: $131,013 (gain)

Aggregate = $103,913

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Arn CenedellaPro Member

Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes

2y

Quote from @Charit P.:

Thanks everyone for you comments. I don’t think it’s depreciation recapture that accounts for the difference. Let me share the actual numbers to illustrate the situation better.

Initial investment in 2020 = $50,000

Cashflow + sale proceeds in 2022 = $40,465 ($90,465 including returned capital)

Following were the reported losses/gains on Form 8582 (captured from my CPA’s worksheets). These numbers are just for this asset, and not offset with other investment losses or gains.

2020: $22,600 (loss)

2021: $4,500 (loss)

2022: $131,013 (gain)

Aggregate = $103,913

@Charit P.

I’ll try one more time.
Whether you are open to input is up to you.

Have you discussed this issue with your CPA?

If so, what does the CPA say?

I’m baffled that you are paying a CPA but then reaching out to BP for an opinion. That’s a little strange. It would be like me going to a MD having tests run and the MD issues a diagnosis and then me going to Facebook to get other medical opinions 😀

The three years of income and expense is not a sufficient data set to determine the answer.

One needs to specifically look at what generated those losses in 2020 and 2021

If the $22,600 loss in 2020 primarily arose from depreciation and you were able to use those losses in 2020, your basis in the property will have been reduced by the amount of the depreciation. This depreciation taken is now recaptured as capital gain. The deprecation when taken is a paper loss the deprecation when recaptured is a paper gain but still taxable gain.

Essentially at sale you are taxed and have to pay back the depreciation taken over the hold.

I will finish with: What does your CPA say?

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Taxes on multi-family syndication

Taxes on multi-family syndication

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