Multifamily syndication- questions about being a passive investor

27 Replies

When looking at being a individual passive investor in a Multifamily syndication, is it best to become an LLC yourself or stay as a individual investor ?

Does anyone know if as an individual passive investor in Multifamily syndications,  your not married but have a significate other, let say you pass away how does that person become a beneficiary?

Does anyone know a good CPA in the Phoenix/Scottsdale, AZ area that handles these type of investments K1, if the investment is from out of state?

Thanks

I invest individually rather than through an LLC. An LLC would add protection that I don't feel I need.

You would identify beneficiaries in your will.

The sponsor will send you a K-1 and that makes it pretty easy for you or your CPA to incorporate the activity in your tax return.

Thanks Mike for a quick response.                                                                                                                        Does a CPA have to submit a seperate state tax return to Texas if you live in Arizona?                                                                                                                                                   I forgot to introduce myself as a small investor with only a few single family homes as rentals in the Phoenix area. My plan is to do some multifamily passive investing.  I have learned so much from Bigger Pockets forum on Multifamily investing and information on vetting syndicators,  to understanding the SEC rules on Accredited to Non accredited investors/sophisticated investors. 

@Debbie Hannappel , there's no need to form an LLC to invest in a syndicated offering. Most offerings are structured as LLCs already so your liability is limited to the capital you invested. Some syndicates are structured as Limited Partnerships, but even in that case the limited partner (you) have the same limited liability as you would as an investor in an LLC.

As to survivorship, there are a couple of solutions. One is you designate in your will who your interest is to go to.  The downside is it has to go through probate. Another way is to create a living trust and title your investment in the name of the trust instead of you as an individual. Then in your trust you designate who is to receive your interest in the event of your death. This avoids probate.

Another solution, if the investment sponsor you are working with allows, is you and your significant other can take title together as joint tenants with right of survivorship. In this case, if you die your interest automatically reverts to your joint tenant, and vice versa.  The downside is that if this is all your money your significant other “owns” half of the investment even while you are still living. Maybe this is fine, maybe not.

@Debbie Hannappel if you already have an LLC that you invest with, it doesn't hurt. I've seen a number of people take that approach. I've also seen partners create an LLC so that they can each invest half of the minimum in double the number of deals and diversify their portfolio even more. However, no real need or overwhelming benefit to forming one just for that purpose.

As to beneficiary, I would echo what @Brian Burke said and recommend looking in to investing with a living trust. You can kill two birds with one stone (as you can cover other assets as well) and additionally, as Brian said, it avoids probate.

@Brian Burke, thank you for the detailed information.  I have read many of your past posts on Syndications and picked up so much valuable information.

@Michael Bishop, I have not setup as an LLC, though its good to know about partnering. Thank you

I think if you are investing more than 500,000 then it might make sense to get a relatively cheap LLC in the mix. Whatever you do don’t commingle rental properties in there too.

@Debbie Hannappel , the people above are correct that there is no advantage of using an LLC from a liability point of view as you are already protected by the limited liability of the partnership, and it is overkill.

However, from a tax point of view: if you don't have another LLC for another business, it can be useful to create one, because then you can better deduct investment related expenses, that you might not be able to deduct at all or as fully on your personal taxes.

(I'm not an accountant or attorney, so it's best to check with your own first).

@Ian Ippolito There is no difference from tax standpoint whether you are investing as an individual or a single member LLC. Since single member LLC tax return is treated as a pass through activity and flows back to your tax return.

@Debbie Hannappel I second @Brian Burke suggestions. Great points! 

Creating an LLC may come into play if you're investing in syndications via your SDIRA or solo 401K accounts. Be aware of UDFI implications when it comes to using SDIRA for investing. Otherwise both are viable options.

If you have any further questions feel free to ask. 

Disclaimer: these are just suggestions, I'm not an accountant (more like a former one :) ) .

Best of luck! 

@Alina Trigub , I’m not taking about taxes on distributions or capital gains. I’m talking  about the deductibility of investment expenses on taxes.

If you invest as an individual, you are subject to a 2% floor before you can deduct them. LLCs can deduct 100%. 

For a person making $100k, the floor is $2k.  So if you spend $1500 in investment expenses, you can’t deduct a penny. 

https://www.schwab.com/resource-center/insights/content/investment-expenses-whats-tax-deductible

If you create an LLC, all expenses involved are deductible so you can deduct the entire $1500. Maybe it cost you $200 to set up the LLC and run it each year, so you end up $1300 better off.

Another aspect to consider is transfer-ability of the shares. 

In many (most?) case, shares in a syndication are non-transferable without approval (usually with an exception for death). This makes sense, since the KPs in the deal have a relation with the investors, and they don't want people swapping in investors that they don't know.

I've heard at least one story in which an investor formed an LLC to buy shares of a syndication, then sold the LLC to someone else, which is effectively a transfer, but I suppose not technically a transfer.

I'm sure a good SEC attorney would find a way disallow that in the PPM, but I'm guessing that it's a hole in a lot of offerings out there.

I wouldn't recommend using an LLC expressly for that purpose, as I feel it's a violation in spirit of the agreement if not the letter, but if available, it offers a potential out if the syndication lead turns out to be incompetent or if you experience a major, irreconcilable life change, or the like.

Hope that helps.

James

As a LP you dont have any liability exposure so LLC is not needed. To assure S/O gets the investment if you die you can create a Living Trust (everyone who owns any property should do so anyway) and name him/her a beneficiary. Then you title all investments in the name of your trust rather than your individual name.

@Ian Ippolito Single member LLC is a pass through entity. All your income and expenses are passed back to the individual member and treated as such. Also with the new tax laws being applied to 2018, there are other changes such as elimination of itemized deductions and such.

So bottom line, consulting with  tax professional on the matter is required.

@Alina Trigub , to avoid that problem, some people can and do add a family member (relative, child, etc) and then they are no longer single member LLC. Or they add a business partner if they have one. Https://www.myllc.com/mbp-family-member-llc.aspx But yes, I did recommend that the OP consult with their own tax and legal professional, before they do anything, so I agree with you there.

I have a fully operational S-corp that has been established  for some consulting services.

Can I use this for passive investing in syndications, from  tax advantage point of view as @Ian Ippolito mentioned ? just don't want to form an LLC just for this, if I can achieve the same thru S-corp.

@Sam Ng , I'm not an accountant, so you really should be consulting with a professional on key questions like this. My understanding is that most do not do an S Corp. for passive investing, because of the higher tax load (for example to do it properly have to pay yourself a salary and have to do payroll taxes etc.)

Protection wise an LLC will not help, since the property will be in an LLC, but tax wise you may have some benefits if you travel to the property or sponsor, hire a CPA, have a home office or have any other expenses related to the investments.

@Debbie Hannappel as many have already said, there is no need to set up an LLC to invest passively in a syndication. As far as the K1's go, you should look to switch from your current CPA if they do not know what to do with it. It is not a complicated form to add, much like a 1099.

All depends on what you are trying to achieve at the end of the day. Work with an attorney and see what kind of will or living trust will work with what you are trying to do in the event that something happens to you. You have a ton of great points from everyone commenting but ultimately, its what you feel comfortable and need for that will get you to the end goal. 

@Sam Ng I would talk to your CPA about this. I'm not sure that the active income from consulting services and the passive income from syndication investments would mix well or have any benefit from a tax advantage point of view.

If you're strictly looking for protection, there really is no need for either an S-Corp or an LLC, since the offering will be set up under it's own LLC anyway and you as a limited or passive partner will only be at risk for your invested capital.

@Sam Ng

You should talk with a CPA/Accountant but there are certain assets that you don't want to hold within a Corporate entity(C or S). 

Furthermore, unless you are the sponsor in a syndication, you may already be a limited partner or a non-managing member which may already cover you from a legal standpoint. Consult with an attorney prior to investing to confirm.

What about the benefit of forming an LLC for outside liability protection? It has been well pointed out that there is no need for an LLC for inside liability (having to do with lawsuits against the apartment complex), but what if you get personally sued? Does holding it in an LLC vs personal name help protect your syndication investment against judgments and charging orders that arise say a personal suit?