Open Door Capital and K1 Investment losses
Hutchinson, MN · Member since 2013 · 5 posts · 3 votes
Open Door Capital and K1 Investment losses
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votesOriginally posted by @Ben Leybovich:
Originally posted by @Matt Pulkrabek:
Unfortunately, this is how my accountant was leaning as well. I was hoping there might be RE accountant who could clarify.
Also unfortunately, there're the usual suspects among BP syndicators who jump on every post mentioning K1s/syndications with their misleading assertions that K1 losses, including cost segregation, are deductible by passive partners. (No, I'm not talking about you, @Ben Leybovich, your comments are solid.)
The shortest possible summary of this very complex topic is:
- The syndicators themselves usually can deduct all losses from the syndications they run
- Their passive partners usually canNOT deduct theirs
- Some strategies exist that may allow passive K1 investors utilize their losses efficiently; it's case by case
- Qualifying for REP status does NOT automatically unlock K-1 losses from syndications, but in some cases it might
Beyond that, all conversations should be one-on-one. It is possible that you can benefit from the aggregation election mentioned on this thread. It is also possible that it won't work in your specific case. This is not simple and not universal, despite what some people said on this thread.
You may also want to look at some of my longer posts on this subject:
https://www.biggerpockets.com/...
46 Replies
- Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes4y
I have a strong hunch that your k1 would show the loss. But I bet if you asked opene door they would be glad to tell you because they want to help you invest in their fund.
- Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes4y
You'll share in profits, losses and depreciation of the property(s) you own according to the percentage of equity you have invested. (at least that's my understanding)
@Matt Pulkrabek I believe any K1 losses will offset any other passive income (ie from other rentals) but you can not use passive losses to offset non-passive income unless you qualify for REPS *And* materially participate which is not possible as an LP. Whether or not having REPS and materially participating in your rental portfolio would then allow you to include losses from a K1 by grouping all your investment activities together for tax treatment (ie can you include the K1 losses even though you are not materially participating in that specific deal if you do otherwise materially participate in your rental portfolio?) I’m not sure. Maybe @Natalie Kolodij can weigh in? Pretty sure you must materially participate in addition to having REPS for non-passive losses to offset non-passive income. For some self education check out the Real Estate CPA Youtube channel & consult your own CPA!
- Hutchinson, MN · Member since 2013 · 5 posts · 3 votes4y
@Brian G.
Thanks for your response. Unfortunately, this is how my accountant was leaning as well. I was hoping there might be RE accountant who could clarify.
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Brian G.:
@Matt Pulkrabek I believe any K1 losses will offset any other passive income (ie from other rentals) but you can not use passive losses to offset non-passive income unless you qualify for REPS *And* materially participate which is not possible as an LP. Whether or not having REPS and materially participating in your rental portfolio would then allow you to include losses from a K1 by grouping all your investment activities together for tax treatment (ie can you include the K1 losses even though you are not materially participating in that specific deal if you do otherwise materially participate in your rental portfolio?) I’m not sure. Maybe @Natalie Kolodij can weigh in? Pretty sure you must materially participate in addition to having REPS for non-passive losses to offset non-passive income. For some self education check out the Real Estate CPA Youtube channel & consult your own CPA!
@Ben Leybovich So Ben your investors in your deals they get no benefit of cost seg and bonus deprection. I was thinking that was one of the major benefits of syndication.. can you clarify or give you opinion on the matter.
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes4y
Originally posted by @Jay Hinrichs:
Originally posted by @Brian G.:
@Matt Pulkrabek I believe any K1 losses will offset any other passive income (ie from other rentals) but you can not use passive losses to offset non-passive income unless you qualify for REPS *And* materially participate which is not possible as an LP. Whether or not having REPS and materially participating in your rental portfolio would then allow you to include losses from a K1 by grouping all your investment activities together for tax treatment (ie can you include the K1 losses even though you are not materially participating in that specific deal if you do otherwise materially participate in your rental portfolio?) I’m not sure. Maybe @Natalie Kolodij can weigh in? Pretty sure you must materially participate in addition to having REPS for non-passive losses to offset non-passive income. For some self education check out the Real Estate CPA Youtube channel & consult your own CPA!
@Ben Leybovich So Ben your investors in your deals they get no benefit of cost seg and bonus deprection. I was thinking that was one of the major benefits of syndication.. can you clarify or give you opinion on the matter.
Jay, first, my company is WhiteHaven Capital. Open Door Capital (ODC) is Brandon Turner.
But, yes, we pass the cost seg and accelerated depreciation onto limited partners. The losses flow through to their K-1.
- 4yGreg O'BrienBusiness MemberAccountant · Boston, MA · Member since 2019 · 386 posts · 336 votes
@Matt Pulkrabek just because your K1 “shows” a loss does not mean you can utilize it. Unless this is grouped under IRC469, as a passive, non participating partner, your losses will be passive.
However, you could use these losses to offset other syndication exits or income
- 4yGreg O'BrienBusiness MemberAccountant · Boston, MA · Member since 2019 · 386 posts · 336 votes
@Jay Hinrichs most LPs are allocated losses but many LPs may not be able utilize them in the current year
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes4y
Originally posted by @Greg O'Brien:
@Jay Hinrichs most LPs are allocated losses but many LPs may not be able utilize them in the current year
This is true, but they roll these losses onto the sale.
- 4yGreg O'BrienBusiness MemberAccountant · Boston, MA · Member since 2019 · 386 posts · 336 votes
@Ben Leybovich of course. We would recommend timing this pass through loss up with another exit as well if the investor has several investments
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes4y
Originally posted by @Greg O'Brien:
@Ben Leybovich of course. We would recommend timing this pass through loss up with another exit as well if the investor has several investments
This is a challenging conversation because investors are not terribly educated in taxes, losses, 1031s, etc. I'll give you an example, and this is from a standpoint of a sponsor.
10 months ago we bought a property. This was a smaller purchase at $16M. The income at the time was around $80,000 per month. Within the next 3 months, the income will be pushing $145,000 per month. The property is now worth almost twice what we paid. Clearly, I am compelled to sell, but this means the investors will have to recapture all of the depreciation we gave them just a few months ago. So what's the point...?
I firmly believe it's a mistake to chase 2 objectives. I have never done 1031 for this reason, though investors have asked. I simply feel I can't win. If I promise a 1031, I may be forced to take a deal I really shouldn't just so I can preserve the 1031, and investors wil be mad later. And, on the other hand, if I stay true to finding the best deal, I may need to pull out of the 1031, angering investors now. Either way, the chances of people being mad now or later are high...
Passive losses are the icing on the cake, nothing more and nothing less. The singular objective for investors should be the validity of the merits of the deal. If the deal is right, you'll make so much money that you should be able to pay some tax and not feel too bad about it. Otherwise, chosing 2 birds can often become a bigger issue.
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Ben Leybovich:
Originally posted by @Jay Hinrichs:
Originally posted by @Brian G.:
@Matt Pulkrabek I believe any K1 losses will offset any other passive income (ie from other rentals) but you can not use passive losses to offset non-passive income unless you qualify for REPS *And* materially participate which is not possible as an LP. Whether or not having REPS and materially participating in your rental portfolio would then allow you to include losses from a K1 by grouping all your investment activities together for tax treatment (ie can you include the K1 losses even though you are not materially participating in that specific deal if you do otherwise materially participate in your rental portfolio?) I’m not sure. Maybe @Natalie Kolodij can weigh in? Pretty sure you must materially participate in addition to having REPS for non-passive losses to offset non-passive income. For some self education check out the Real Estate CPA Youtube channel & consult your own CPA!
@Ben Leybovich So Ben your investors in your deals they get no benefit of cost seg and bonus deprection. I was thinking that was one of the major benefits of syndication.. can you clarify or give you opinion on the matter.
Jay, first, my company is WhiteHaven Capital. Open Door Capital (ODC) is Brandon Turner.
But, yes, we pass the cost seg and accelerated depreciation onto limited partners. The losses flow through to their K-1.
Ben I know.. but I also know tagging Brandon would not have gotten a response LOL.. I figured I had a better chance with you.
Greg,
now for us that are full time real estate professionals and taxed as such cost seg and bonus deprecation on our personal investments is available, correct? and I was under the impression if I invested in a syndication, I could also take the cost seg the syndicator was doing even though I am not a material participant in their project. If I cant on a syndication then I can deduct it from rental income on my personal investments ?
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes4y
Originally posted by @Jay Hinrichs:
Originally posted by @Ben Leybovich:
Originally posted by @Jay Hinrichs:
Originally posted by @Brian G.:
@Matt Pulkrabek I believe any K1 losses will offset any other passive income (ie from other rentals) but you can not use passive losses to offset non-passive income unless you qualify for REPS *And* materially participate which is not possible as an LP. Whether or not having REPS and materially participating in your rental portfolio would then allow you to include losses from a K1 by grouping all your investment activities together for tax treatment (ie can you include the K1 losses even though you are not materially participating in that specific deal if you do otherwise materially participate in your rental portfolio?) I’m not sure. Maybe @Natalie Kolodij can weigh in? Pretty sure you must materially participate in addition to having REPS for non-passive losses to offset non-passive income. For some self education check out the Real Estate CPA Youtube channel & consult your own CPA!
@Ben Leybovich So Ben your investors in your deals they get no benefit of cost seg and bonus deprection. I was thinking that was one of the major benefits of syndication.. can you clarify or give you opinion on the matter.
Jay, first, my company is WhiteHaven Capital. Open Door Capital (ODC) is Brandon Turner.
But, yes, we pass the cost seg and accelerated depreciation onto limited partners. The losses flow through to their K-1.
Ben I know.. but I also know tagging Brandon would not have gotten a response LOL.. I figured I had a better chance with you.
Greg,
now for us that are full time real estate professionals and taxed as such cost seg and bonus deprecation on our personal investments is available, correct? and I was under the impression if I invested in a syndication, I could also take the cost seg the syndicator was doing even though I am not a material participant in their project. If I cant on a syndication then I can deduct it from rental income on my personal investments ?
Jay, you, as a professional, can treat depreciation stemming from cost seg as any other depreciation. The argument here is that those who are not under the status of real estate professional, while they get this depreciation, may not be able to apply it in the given year. This is a non-issue for us.
Separately - are you saying you are going to start investing in WhiteHaven deals?
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Ben Leybovich:
Originally posted by @Jay Hinrichs:
Originally posted by @Ben Leybovich:
Originally posted by @Jay Hinrichs:
Originally posted by @Brian G.:
@Matt Pulkrabek I believe any K1 losses will offset any other passive income (ie from other rentals) but you can not use passive losses to offset non-passive income unless you qualify for REPS *And* materially participate which is not possible as an LP. Whether or not having REPS and materially participating in your rental portfolio would then allow you to include losses from a K1 by grouping all your investment activities together for tax treatment (ie can you include the K1 losses even though you are not materially participating in that specific deal if you do otherwise materially participate in your rental portfolio?) I’m not sure. Maybe @Natalie Kolodij can weigh in? Pretty sure you must materially participate in addition to having REPS for non-passive losses to offset non-passive income. For some self education check out the Real Estate CPA Youtube channel & consult your own CPA!
@Ben Leybovich So Ben your investors in your deals they get no benefit of cost seg and bonus deprection. I was thinking that was one of the major benefits of syndication.. can you clarify or give you opinion on the matter.
Jay, first, my company is WhiteHaven Capital. Open Door Capital (ODC) is Brandon Turner.
But, yes, we pass the cost seg and accelerated depreciation onto limited partners. The losses flow through to their K-1.
Ben I know.. but I also know tagging Brandon would not have gotten a response LOL.. I figured I had a better chance with you.
Greg,
now for us that are full time real estate professionals and taxed as such cost seg and bonus deprecation on our personal investments is available, correct? and I was under the impression if I invested in a syndication, I could also take the cost seg the syndicator was doing even though I am not a material participant in their project. If I cant on a syndication then I can deduct it from rental income on my personal investments ?
Jay, you, as a professional, can treat depreciation stemming from cost seg as any other depreciation. The argument here is that those who are not under the status of real estate professional, while they get this depreciation, may not be able to apply it in the given year. This is a non-issue for us.
Separately - are you saying you are going to start investing in WhiteHaven deals?
good one Ben will see !! I have always been kind of a do it yourself guy.. But I see some of your deals are smashing success's congrats !
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes4y
Originally posted by @Jay Hinrichs:
Originally posted by @Ben Leybovich:
Originally posted by @Jay Hinrichs:
Originally posted by @Ben Leybovich:
Originally posted by @Jay Hinrichs:
Originally posted by @Brian G.:
@Matt Pulkrabek I believe any K1 losses will offset any other passive income (ie from other rentals) but you can not use passive losses to offset non-passive income unless you qualify for REPS *And* materially participate which is not possible as an LP. Whether or not having REPS and materially participating in your rental portfolio would then allow you to include losses from a K1 by grouping all your investment activities together for tax treatment (ie can you include the K1 losses even though you are not materially participating in that specific deal if you do otherwise materially participate in your rental portfolio?) I’m not sure. Maybe @Natalie Kolodij can weigh in? Pretty sure you must materially participate in addition to having REPS for non-passive losses to offset non-passive income. For some self education check out the Real Estate CPA Youtube channel & consult your own CPA!
@Ben Leybovich So Ben your investors in your deals they get no benefit of cost seg and bonus deprection. I was thinking that was one of the major benefits of syndication.. can you clarify or give you opinion on the matter.
Jay, first, my company is WhiteHaven Capital. Open Door Capital (ODC) is Brandon Turner.
But, yes, we pass the cost seg and accelerated depreciation onto limited partners. The losses flow through to their K-1.
Ben I know.. but I also know tagging Brandon would not have gotten a response LOL.. I figured I had a better chance with you.
Greg,
now for us that are full time real estate professionals and taxed as such cost seg and bonus deprecation on our personal investments is available, correct? and I was under the impression if I invested in a syndication, I could also take the cost seg the syndicator was doing even though I am not a material participant in their project. If I cant on a syndication then I can deduct it from rental income on my personal investments ?
Jay, you, as a professional, can treat depreciation stemming from cost seg as any other depreciation. The argument here is that those who are not under the status of real estate professional, while they get this depreciation, may not be able to apply it in the given year. This is a non-issue for us.
Separately - are you saying you are going to start investing in WhiteHaven deals?
good one Ben will see !! I have always been kind of a do it yourself guy.. But I see some of your deals are smashing success's congrats !
There are very few people I admire. Tell me what I need to do for us to work together. I am game!
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Ben Leybovich:
Originally posted by @Jay Hinrichs:
Originally posted by @Ben Leybovich:
Originally posted by @Jay Hinrichs:
Originally posted by @Ben Leybovich:
Originally posted by @Jay Hinrichs:
Originally posted by @Brian G.:
@Matt Pulkrabek I believe any K1 losses will offset any other passive income (ie from other rentals) but you can not use passive losses to offset non-passive income unless you qualify for REPS *And* materially participate which is not possible as an LP. Whether or not having REPS and materially participating in your rental portfolio would then allow you to include losses from a K1 by grouping all your investment activities together for tax treatment (ie can you include the K1 losses even though you are not materially participating in that specific deal if you do otherwise materially participate in your rental portfolio?) I’m not sure. Maybe @Natalie Kolodij can weigh in? Pretty sure you must materially participate in addition to having REPS for non-passive losses to offset non-passive income. For some self education check out the Real Estate CPA Youtube channel & consult your own CPA!
@Ben Leybovich So Ben your investors in your deals they get no benefit of cost seg and bonus deprection. I was thinking that was one of the major benefits of syndication.. can you clarify or give you opinion on the matter.
Jay, first, my company is WhiteHaven Capital. Open Door Capital (ODC) is Brandon Turner.
But, yes, we pass the cost seg and accelerated depreciation onto limited partners. The losses flow through to their K-1.
Ben I know.. but I also know tagging Brandon would not have gotten a response LOL.. I figured I had a better chance with you.
Greg,
now for us that are full time real estate professionals and taxed as such cost seg and bonus deprecation on our personal investments is available, correct? and I was under the impression if I invested in a syndication, I could also take the cost seg the syndicator was doing even though I am not a material participant in their project. If I cant on a syndication then I can deduct it from rental income on my personal investments ?
Jay, you, as a professional, can treat depreciation stemming from cost seg as any other depreciation. The argument here is that those who are not under the status of real estate professional, while they get this depreciation, may not be able to apply it in the given year. This is a non-issue for us.
Separately - are you saying you are going to start investing in WhiteHaven deals?
good one Ben will see !! I have always been kind of a do it yourself guy.. But I see some of your deals are smashing success's congrats !
There are very few people I admire. Tell me what I need to do for us to work together. I am game!
Be in touch we dont want to violate the BP rules now do we ?
- Hutchinson, MN · Member since 2013 · 5 posts · 3 votes4y
@Jay Hinrichs
@Ben Leybovich
@Greg O'Brien
Thank you all for your contribution. The majority of my income comes through my real estate activities as an agent and broker. Although I was hoping to offset this income with K1 losses as an LP, this information is still very helpful!
- 4yGreg O'BrienBusiness MemberAccountant · Boston, MA · Member since 2019 · 386 posts · 336 votes
@Jay Hinrichs You must also Materially Participate in the activity even if you have REP. If this was part of an aggregation then you may be able to
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Greg O'Brien:
@Jay Hinrichs You must also Materially Participate in the activity even if you have REP. If this was part of an aggregation then you may be able to
what does REP stand for ? in reality the reason folks invest with syndicators is not to have to do any work other than stroke a check. none of the Limited's participate in the deal.. so your saying none of the limited will get the bonus deprecation that the sponsor is doing with cost seg ???
- 4yGreg O'BrienBusiness MemberAccountant · Boston, MA · Member since 2019 · 386 posts · 336 votes
@Jay Hinrichs sorry REP is Real Estate Professional (the tax definiton of one).
If a taxpayer is a LP and does not meet REP nor Materially Participate under IRC 469, your excess losses would become suspended but ultimately utilized and released upon sale of the activity or from offsetting passive income from passive activities.
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Greg O'Brien:
@Jay Hinrichs sorry REP is Real Estate Professional (the tax definiton of one).
If a taxpayer is a LP and does not meet REP nor Materially Participate under IRC 469, your excess losses would become suspended but ultimately utilized and released upon sale of the activity or from offsetting passive income from passive activities.
however if he/she does meet the definition of REP then they can participate in the cost seg bonus deprecation correct ?
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Greg O'Brien:
@Jay Hinrichs sorry REP is Real Estate Professional (the tax definiton of one).
If a taxpayer is a LP and does not meet REP nor Materially Participate under IRC 469, your excess losses would become suspended but ultimately utilized and released upon sale of the activity or from offsetting passive income from passive activities.
Back when the Gozone first came out post Katrina Gulf Opportunities act.. you could take bonus deprecation for new construction in the affected areas that was put into service.. However one needed to be REP or owner user.. So a ton of owners built new facilities.. I personally bought 12 New constructions and promptly got audited for those purchase but passed the sniff test with the IRS IE REP.. I have also been audited on our bonus depreciation's on our Airplanes.. and passed that one.. IE we used them for our business majority of the time.
- 4yGreg O'BrienBusiness MemberAccountant · Boston, MA · Member since 2019 · 386 posts · 336 votes
@Jay Hinrichs yes the allocations from the fund level or syndicate level would not need to change based on the LP status. They still could be allocated the depreciation, which may or may not mean they can use it.
Each LP may have different tax cosequences at their individual level. So one LP may be able to use their losses in the current year while others may have their losses suspended (on form 8582) for a period of time.
- Investor · Washington, DC · Member since 2016 · 22 posts · 15 votes4y
Originally posted by @Ben Leybovich:
Probably depends on the investor. Sounds like you've done a great job of increasing the value of the property, congrats! Personally, I'd be happy to have my original investment back plus the profit ASAP so I can reinvest into more deals... rinse and repeat.
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