Property tax deductions on W2 in Syndications
Member since 2023 · 40 posts · 10 votes
Property tax deductions on W2 in Syndications
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Rick MartinPro Member
Rental Property Investor · Redondo Beach, CA · Member since 2017 · 411 posts · 477 votes@Sateesh Kumar "owner-occupied" makes it different, but if it's an investment property (rental property) vs a syndication investment, it's the same. You are furnished with a K1 through the syndication that allows you to write off all the expenses that you mentioned, but only against passive gains. It's important to understand that. You can only write off passive losses against passive gains. Not portfolio income (stocks, bonds) or earned income (unless you or your spouse are a real estate professional). This goes for whether it's a syndication or any real estate investment.
10 Replies
- 2yArn CenedellaPro MemberRental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
All these deductions are reflected on your K1.
- Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes2y
Hello @Sateesh Kumar,
These syndication deductions are only against passive income. If you need to use them against your w2 active income, you need to be a real estate professional. Since qualifying as real estate professional is near impossible to qualify for with a w2, you would need your spouse to qualify for it.
- Member since 2023 · 40 posts · 10 votes2yThanks Zachary. I am trying to compare and contrast a Syndication investment with a straight ownership of a real estate for example owning an owner occupied triplex where one can deduct property taxes , maintenance, insurance etc I thought property tax can be deducted on the W2 income
Quote from @Account Closed:
Hello @Sateesh Kumar,
These syndication deductions are only against passive income. If you need to use them against your w2 active income, you need to be a real estate professional. Since qualifying as real estate professional is near impossible to qualify for with a w2, you would need your spouse to qualify for it.
- 2yRick MartinPro MemberRental Property Investor · Redondo Beach, CA · Member since 2017 · 411 posts · 477 votes
@Sateesh Kumar "owner-occupied" makes it different, but if it's an investment property (rental property) vs a syndication investment, it's the same. You are furnished with a K1 through the syndication that allows you to write off all the expenses that you mentioned, but only against passive gains. It's important to understand that. You can only write off passive losses against passive gains. Not portfolio income (stocks, bonds) or earned income (unless you or your spouse are a real estate professional). This goes for whether it's a syndication or any real estate investment.
- Member since 2023 · 40 posts · 10 votes2y
Thank You. If I understand it correctly in the case of a owner occupied duplex say if the property tax is 10k ,5k is deductible under passive bracket against passive rental income and for the owner occupied unit 5k is deductible from W2 income by virtue of being primary home unit?
- 2yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
your share of income / expenses are reflected on the K-1.
If the LLC agreement mentions that you are getting 10% of the income and expenses.
You will see a net figure on your k-1 incorporating all the income and expenses.
Basit Siddiqi CPA4.979 Reviews - Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes2y
Quote from @Sateesh Kumar:
Thanks Zachary. I am trying to compare and contrast a Syndication investment with a straight ownership of a real estate for example owning an owner occupied triplex where one can deduct property taxes , maintenance, insurance etc I thought property tax can be deducted on the W2 incomeQuote from @Account Closed:
Hello @Sateesh Kumar,
These syndication deductions are only against passive income. If you need to use them against your w2 active income, you need to be a real estate professional. Since qualifying as real estate professional is near impossible to qualify for with a w2, you would need your spouse to qualify for it.
that is correct, but we are talking about a different code now and property tax in the grand scheme of things is a mich smaller write off. If your goal is to pay significantly less tax, you need to change strategies, or else face that big tax bill come tax season!
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes2y
@Sateesh Kumar, I believe you have your answer. When comparing syndication to a pure investment property (you are not Owner occupying any portion) the treatment is generally the same. And being a W2, non-real estate professional, while you get access to those expenses and others, to offset the income earned, it will generally NOT reduce your tax bill stemming from your W2 earnings.
One thing I would note, regarding the structure of a syndication and pass through losses: deprectiation tends to be the largest line item for "expenses" and creating net losses on your K-1. However, how different syndicators allocate depreciation varies widely. If you see syndication structures that show the GP has 30% ownership in the entity, that is often setup to allow the syndicator to take 30% of the pass through losses right off the top. I.e. if there is $1mm of net loss in that year, the syndicator can take $300,000 of that loss, leaving you and the other LPs to split the remaining 70% prorata based on equity invested.
If tax losses through a syndication are your goal, and you want to maximize those losses (again, your current situation doesn't appear to allow you to take advantage of them anyways), then understanding this allocation is very important in your due diligence with the syndicator.
- Member since 2023 · 40 posts · 10 votes2y
Quote from @Evan Polaski:
@Sateesh Kumar, I believe you have your answer. When comparing syndication to a pure investment property (you are not Owner occupying any portion) the treatment is generally the same. And being a W2, non-real estate professional, while you get access to those expenses and others, to offset the income earned, it will generally NOT reduce your tax bill stemming from your W2 earnings.
One thing I would note, regarding the structure of a syndication and pass through losses: deprectiation tends to be the largest line item for "expenses" and creating net losses on your K-1. However, how different syndicators allocate depreciation varies widely. If you see syndication structures that show the GP has 30% ownership in the entity, that is often setup to allow the syndicator to take 30% of the pass through losses right off the top. I.e. if there is $1mm of net loss in that year, the syndicator can take $300,000 of that loss, leaving you and the other LPs to split the remaining 70% prorata based on equity invested.
If tax losses through a syndication are your goal, and you want to maximize those losses (again, your current situation doesn't appear to allow you to take advantage of them anyways), then understanding this allocation is very important in your due diligence with the syndicator.
Thanks Evan. Just to given you an overview of my situation I am considering selling an owner occupied Duplex due to an out of state job relocation, per my understanding once I sell 50% of the profit will be accounted for long term capital gains tax and 50% of it will be tax free because half of it my primary. I have carryover passive losses in place to mostly cover the capital gains tax on the rental unit if I sell. Other alternative I have is continue renting and manage as a long distance landlord given I am on a low mortgage rate of 2.5%. Managing from long distance feels like an hassle so I am trying to pivot towards selling and investing the sales proceeds into multiple Syndications so that the cash flow, tax advantages,equity multiple closely match the returns of my current property while also being well diversified. Do you think it's doable with syndications? Just to provide you the numbers.
Loan balance 500k at 2.5% for next 27 years
PITI 3600
Rental income per month 7500
Bought property in 2017 for 730k
Current Value at 1.2 to 1.3 mil
Feels like a perfect time to exit given my job relocation and researching syndications because owning straight real estate is not making sense in the CA bay area, very interested in getting some perspectives from others who are into syndications. - 2yArn CenedellaPro MemberRental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
Quote from @Account Closed:
Hello @Sateesh Kumar,
These syndication deductions are only against passive income. If you need to use them against your w2 active income, you need to be a real estate professional. Since qualifying as real estate professional is near impossible to qualify for with a w2, you would need your spouse to qualify for it.
@Account Closed Excellent point. And one often missed. I would like to clarify a detail. In a syndication, on the K1 the typical real estate deductions for property taxes, insurance, repairs, etc are accounted for on the K1 so the investor does get the advantage of these write offs in the sense they reduce rental income reported on the K1. So LP do get the advantage of these deductions to the degree they are used to offset rental income.
Here are some numbers to illustrate:
$100,000 rental income less $80,000 of expenses including depreciation leaves $20,000 profit.
In this case the investors do benefit for the $80,000 in expenses and depreciation as they are only taxed on the $20,000 profit.
On the other hand if the numbers are $100,000 rental income less $120,000 of expenses including depreciation for a $20,000 loss.
As you note, the $20,000 loss is passive and can’t be used to offset W2 income. It is carried forward on the taxpayer books until it can be used.
Bottom line syndication investors get the same host of deductions other real estate investors do to the extend they offset other rental income. Any loss above this can’t be used and is carried forward.
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