Syndicator's acquisition fee tax deductions

13 Replies

Can you deduct operating expenses from acquisition fee received? Let's say you received $30,000 in acquisition fees, the first year operating expenses of the property is $45,000. Can you deduct all of that? Or do you only get to deduct whatever costs you before closing?

The accountants on the boards can better answer this but, the acquisition fee is ordinary income and is taxed right away. This is income to you and the expenses you are referencing are for the property (LLC) and not your personal expenses so you won't be able to deduct them from your income.

Start up costs are an LLC expense as well and have no effect on your ordinary income. This is part of the reason I don't personally do acquisition fees myself.

You should consult with your own CPA as everyone's situation and structure is different though.

@Bruce Petersen thanks Bruce. What are, if any, the expenses that can be deducted? For examples, all the books I purchased to learn about syndication, all the miscellaneous fees I paid to find this deal, all the association memberships, all my current office supplies, traveling fees to go see different properties to find a good deal. All of this eventually lead to the acquisition. Any CPA's who can chip in?

@Jingwen Dunford also there are training costs, software costs, my own office supplies, work computer, phone, gas, different fees to attend events to find deals. Just a bunch of miscellaneous things to make this acquisition possible. Would those count towards tax deductions?

@Jingwen Dunford

You should be able to write off educational things or events on your 1040. 

Many of the items you are asking about should be fine to write off but it sounds like you need to find a good bookkeeper and/or CPA to give you some guidance here. Everyone's situation is different.

Main thing is you can't use the real estate businesses expenses to off-set your personal income. These are two separate returns.

@Jingwen Dunford somewhere between 30-33%. If you're filing as an S-corp you may be at 20%. Capital gains is taxed as regular income. Why the highest rate? That's a question of you have to ask the government and Uncle

If the acquisition fee is awarded to another LLC you own that has expenses you may be able use them to reduce your tax liability.

Many syndicators roll the fee into the deal as equity in the form of "profits interest" to avoid paying regular income tax.

I'm not a CPA, are there any out there that can chime in?

There are costs associated with continuing education, operations of the existing business, maintenance, etc.

There are education costs, travel and other things which are for a new career or a new business. 

From what I know, they are treated very differently. You can not deduct you collage/university tuition. You can not deduct the cost of starting something new. Once you have started, you can deduct the costs to maintain or continue. 

Speak with a CPA for the fine details. 

A more macro view is to outsource the question and the solution to a professional show spends their life focused on the tax code. Then, with the freed up time, hunt for a new deal which will cover any costs. Even if something is deductible, you are still paying the bulk of the cost from your pocket. A 40% deduction implies 60% comes from you. 1 extra deal covers a lot of tax.

@Jingwen Dunford

The original post is a little confusing to me.

Are you operating as a general partner/syndicator where you are collecting an acquisition fee from investors to invest with you or upon the purchase of a property?

If this is answered yes, this acquisition fee is normally paid to a management company or specifically allocated to the general partner of the fund.

This income is normally considered non-passive. 
Ordinary and necessary expenses available to syndicators can be used to off-set the income.
There are potentially start-up expenses that can be offset to reduce it.

The operating expenses you mentioned with the operating of the rental business is normally separated.

The way it is normally done in practice
ABC, LLC is the entity that holds the assets
DEF, LLC is the entity that manages the assets within ABC, LLC
The investors in ABC, LLC pay a management fee/acquisition fee to DEF, LLC to manage the property.

ABC, LLC P&L will be rental income and rental expenses
DEF, LLC P&L will be management fee income and operating expenses.

I hope this helps.