Syndication exit strategy to defer depreciation recapture tax.

Member since 2020 · 39 posts · 10 votes

I wanted to explore Syndication as a passive investment opportunity with fellow BP members. I am not able to figure out if it is possible to defer the depreciation recapture gains when the syndicate goes the full cycle. I will appreciate getting some perspective if you have exited syndication or invested in one. How to come to terms with the depreciation tax hit at the time syndication sells.

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Basit SiddiqiBusiness Member

Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes

Everyone is in a different tax situation so it is not the best to see what another person is doing and roll with it. You should check in with your CPA/Accountant.

Investing in another syndication(who will do a cost segregation) will not solve the issue of exiting a syndication with a large gain.

The character of the gain is different -
The new syndication will generate passive income while the syndication you are exiting is generating portfolio income. You may not potentially be able to offset the two.

There are some exceptions such as being able to claim real estate professional...However, never should be made the assumption on this board that you are.

[email protected]917-280-8544

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Brian Adams
Syndicator of Large Apartment Buildings · Glen Mills, PA · Member since 2009 · 1k+ posts · 1k+ votes
5y
@Jessica Singh what are you trying to accomplish by deferring the deprecation recapture?

In my syndicated deals, the investor likes accelerating tax depreciation to reduce ordinary income and when the asset is sold any gains are taxed at a lower tax rate such as cap gains. I agree there a recapture piece at sale.
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Daniel Han
Investor · Member since 2019 · 74 posts · 70 votes
5y
If the property is sold, you would end up with taxable income(if everything goes as planned). If you invest in another syndication in that calendar year, wouldn't the accelerated depreciation from the new investment reduce that taxable income from the sold property? effectively deferring tax to the future date?
as long as you can generate new depreciation using the previous syndication gain and/or new money into syndication that's greater than the preferred return + gains from the sale, you can defer the tax.
My understanding is that when you die, this deferred tax is wiped out because the investment would be "stepped up" to FMV for the kids.
This seems like a great strategy for W2 earners who can invest in syndication every year with an increasing amount.
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Jessica Singh
OP
Member since 2020 · 39 posts · 10 votes
5y
@Brian Adams: Since one can't 1031 with the funds once syndicate comes full circle, I was trying to explore ideas to defer taxes the same way 1031 helps
@Daniel Han : This is a good way to think to defer taxes! To time syndicated investments so when exiting from one, buy another one so the gains of the one exiting from are offset by the losses from the ones bought.

I wonder if anyone is putting this strategy into practice!

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Lane Kawaoka
Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
5y
Yes you pay back the depreciation recapture and capital gains but that's why you need to be in dozens of syndication deals so you always have a few hundred k of passive losses to offset before you redeploy and get more passive losses.

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.

Let me know if you have specific questions and I can point you in the right direction.
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Andrew HoganPro Member
Rental Property Investor · Indianapolis, IN · Member since 2016 · 559 posts · 463 votes
5y
Well put @Daniel Han!

@Jessica Singh. Currently, folks are able to take advantage of 100% bonus depreciation. The way Dan said it is how intelligent investors are getting 1031-like effects without having to do one. Pretty awesome!
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Jessica Singh
OP
Member since 2020 · 39 posts · 10 votes
5y
@Lane Kawaoka: Thx, messaging you.

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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
5y
Everyone is in a different tax situation so it is not the best to see what another person is doing and roll with it. You should check in with your CPA/Accountant.

Investing in another syndication(who will do a cost segregation) will not solve the issue of exiting a syndication with a large gain.

The character of the gain is different -
The new syndication will generate passive income while the syndication you are exiting is generating portfolio income. You may not potentially be able to offset the two.

There are some exceptions such as being able to claim real estate professional...However, never should be made the assumption on this board that you are.
[email protected]917-280-8544
Basit Siddiqi CPA4.979 Reviews
View Page
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Jessica Singh
OP
Member since 2020 · 39 posts · 10 votes
5y
Great point @Basit Siddiqi! I am certainly not a "real estate professional" to make this work for me. Thank you for pointing out the difference.

@Daniel Han and @Lane Kawaoka - any other ideas to defer the taxes when exiting from syndication for non-real estate professionals?
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Daniel Han
Investor · Member since 2019 · 74 posts · 70 votes
5y
@Jessica Singh You might want to talk to your CPA about it. I haven't gone through the entire syndication cycle yet to tell you for sure. However, my CPA told me that depreciation from the new syndication investment should offset the capital gain of the sale.
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