Moving from SFR to Syndication Tax Benefits
Cedar Park, TX · Member since 2015 · 2 posts · 2 votes
I am new to Apartment Syndications. Trying to get ideas on how can I efficiently join with 1031 in place or should I avoid 1031 with TIC. Background: Selling my SFR in Austin Investment Property and thinking to put money in Apartment Syndications. How complex it is? Should I just take money now and pay taxes or its better to do go through 1031. I have heard through a friend that I can offset my capital gains from my current SFR using depreciation or something called bonus depreciation. Is it possible? Would really appreciate if someone can share ideas or their journeys who had taken similar approach in past? Thank you
@Pratik Sheth First of all, I am not a CPA. But I did hear a real estate CPA talk about a "lazy 1031 exchange" that doesn't involve all of the rules and paperwork of a 1031 exchange. When you sell your SFHs, invest in apartment syndications that same year so that you can take advantage of the bonus depreciation to offset your capital gains. Virtually all syndicators are doing cost segregation studies to take advantage of this accelerated depreciation. You do not have to be a REP to do this. When the syndication goes full cycle, you will have depreciation recapture, but just reinvest in another syndication in that calendar year and you will reap those tax benefits again.
@Pratik Sheth Not sure its clear what you are asking. If your goal is to take the money and invest it anyway, then its generally better to do a 1031 that way you can differ your capital gain taxes in 2021 to a later date when you eventually end of selling the property. In theory you can keep doing 1031 forever until you pass the property down through will or other means. Bonus depreciation is to offset your taxes while you still own the property with something like Cost Segregation, when you sell it, all the depreciation will have to be recaptured to calculate the gain.
If you are contemplating selling it, take the hit on capital gains but then offset those gains with something else - you would do that if you can show corresponding loss (passive or active depending on whether you qualify as REP). To come up with this loss to offset the gains from this property, you potentially need another investment property. Your primary home unfortunately doesnt qualify as investment property.
If its not making sense, you might want to read these topics. Simple search will yield several good articles.
@Pratik Sheth First of all, I am not a CPA. But I did hear a real estate CPA talk about a "lazy 1031 exchange" that doesn't involve all of the rules and paperwork of a 1031 exchange. When you sell your SFHs, invest in apartment syndications that same year so that you can take advantage of the bonus depreciation to offset your capital gains. Virtually all syndicators are doing cost segregation studies to take advantage of this accelerated depreciation. You do not have to be a REP to do this. When the syndication goes full cycle, you will have depreciation recapture, but just reinvest in another syndication in that calendar year and you will reap those tax benefits again.
As Steve said, the "Lazy 1031" might work for you. I sold most of my active rentals and didn't do a 1031 because I didn't want to be active anymore. There are a few syndicators who will allow 1031's into their deal, but it is complicated and the timing is difficult. Using the bonus depreciation from a syndication investment allows you to offset your gains through deferral - just like a standard 1031 - and the only timing issue is it needs to be done in the same tax year so you have the loss to offset the gain. And as mentioned by Steve, when the syndication sells you recapture the tax (often at a lower rate) but you can offset that again by investing in a new syndication. You can effectively defer taxes until your death by continuing to invest in real estate syndications. The challenge it so find great syndicators who do cost segregations and bonus depreciation on their properties. Joining a Community can help you find quality syndicators and network with like-minded people who are doing the same things as you!
Here are some tax benefits to consider:
In 2018 I sold 7 sfhs and had 200k of capital gains. I just offset it with 200k of passive losses that I built up by going into syndications.
The 1031 exchange is a method of pushing forward the taxes due on the capital gains of a property. You have 45 days to identify replacement property that 180 to close on said property(s).
Its a way of kicking the can down the road with taxes. I personally that you have to pay taxes at some point unless you are going to take it to the grave with you which is not very practical due to the following.
1) The 45 days is almost impossible to execute. To be able to line up a deal that is “hot”. Experienced investors spend an average of 18 months to find that elusive first apartment. Now if you are buying lukewarm deals… then be my guest. But in this seller's market, I think its a way to lose everything.
2) Most investors that I work with are high net worth and able to cashflow income minus expenses over $30k a year and have over 50K of liquidity on hand. I believe that most people, unless they are talented at being an elite investor, should just be an LP role in a syndication due to the scalability and being able to spread their capital across different leads, business plans, asset classes, and geographical locations. That said a 1031 exchange will not allow you from going from real property to an LLC (ownership in a syndication). Although you could do what is called a Tenant-In-Common (TIC) arrangement where an investor has 1031 exchange funds and wants to parlay that money into a syndication. It's possible but from the syndicator's perspective a lot of unneeded work when you can just raise the funds the traditional way. Caveat: if you are bringing in a huge amount of money say 50% of the raise then that might tip the scales in your favor). We would do a TIC with you but you would need to bring in more than 1-2Mfor it to make it worth the administrative burden.
Again when we sell the asset in 5-10 years anyway you will be in the same but worse predicament. Take advantage of bonus depreciation now.
There are reverse exchanges and other more exotic exchanges but I personally not sold on the concept when the IRS comes knocking. I am not a tax professional but I feel it is tax evasion.
As a LP investor in syndications deals large enough to pay a guy 5-10K we do cost segregation in order to get bonus depreciation and write off a huge portion of the taxes from exiting the last deal. Basically bones depreciation has made 1031s obsolete.
The order in which suspended losses are deducted is:
1. To first offset depreciation recapture and gain from the activity that was sold.
2. If the suspended losses are in excess of the total gain, the remaining suspended losses will then offset ordinary income.
3. If the suspended losses do not offset 100% of the gain from the activity that was sold, you may use suspended losses from other rental activities to offset the remainder of the gain from sale.
This is detailed in IRC Sec. 469(g)(1)(A). And if you want to have a wild Wednesday night, here's an article that explains it in-depth:
@Pratik Sheth Listen to this week's episode of The Real Estate CPA podcast - Exit 01: How to Reduce Capital Gains Taxes on Real Estate with Passive Losses... They talk about your situation.