Taxation of Cash Flow/Equity Gain in MF Syndications

[Jason Merchey]

How are 1) cash flows and 2) any equity gains upon disposition treated in multifamily syndications? I've never been through one round-trip.

My understanding is this: the cash flow distributions are not taxed because of the "losses" sponsors can generate for LPs on paper due to cost-segregated depreciation. Then, 3-7 years later (or more) upon disposition, assuming there is a 25-75% capital gain above and beyond the cash flow, that is taxed -- as long term capital gains. 

Now, what happens to the cash flow that occurred in years 1, 2, 3, 4 and 5 — is that recaptured (or whatever) and also taxed? 

Is ANY of the cash flow or equity gain taxed at one’s regular income tax rate? 

Am I missing anything? I am under the impression that folks love REI for tax advantages, but obviously I only have a loose understanding of the advantages -- or if they are really rather overemphasized by sponsors.

If you had to place a number on it, would 20% be the amount that, when all’s said and done, one tends to owe the govt. in taxes on standard MF syndications?

[Brian Burke]

Depreciation offset some or all of the cash flow, most likely. But whatever depreciation was taken must be recaptured at sale.  Depreciation recapture is taxed at a lower rate than ordinary income but higher than long-term capital gain—so ultimately there is a tax savings.  It’s also possible that some of the gain upon sale can be attributed to the land instead of the structures, which shifts some of the recapture to capital gain.