Passive RE investing and unallowed losses

[Sam Dal]

Guys - this is regarding investing passively in multi-family. Can you take unallowed losses accumulated for a property directly against capital gains when the property is sold? In addition, am I accurate in stating that passive RE investing isn't tax avoided but rather tax deferred on distributions which you can re-invest immediately and then pay off later at property sale

If somebody also has a blog or video which talks about how to read your final k-1, that'll be helpful. I found quite a few on regular k1's but nothing on the final k-1

Thanks

[Michael Plaks]

Quote from @Sam Dal:

Guys - this is regarding investing passively in multi-family. Can you take unallowed losses accumulated for a property directly against capital gains when the property is sold? In addition, am I accurate in stating that passive RE investing isn't tax avoided but rather tax deferred on distributions which you can re-invest immediately and then pay off later at property sale

If somebody also has a blog or video which talks about how to read your final k-1, that'll be helpful. I found quite a few on regular k1's but nothing on the final k-1

What you're asking for (final K-1) would be a 2-day course for CPAs with prior accounting and tax background. Sorry, it is impossible to learn in 10 minutes. You don't "read" K-1s, especially the final ones, like you can read a W2.

If we're talking about a multi-family syndication, the final K-1 will have at least 4 components that matter for tax purposes:

1. Current year income/loss in Box 2

2. Capital gain, properly called Section 1031 gain in Box 10

3. Portion of the above gain that is taxed under the depreciation recapture rules in Box 9c

4. Partner's ending basis that can create an additional gain or loss which is not on K1 itself but on a separate statement

All prior suspended losses from this investment are indeed released in the year of sale, but not against capital gains really. They end up offsetting the non-REI income, due to a very complex formula applied at sale.

Trying to figure it out without good tax software is futile. I wish it was simple, but it just isn't.

[Sam Dal]

It is complete indeed but you seem to know this well. Do you mind providing some more details on this statement and if it can offset some w-2 income

All prior suspended losses from this investment are indeed released in the year of sale, but not against capital gains really. They end up offsetting the non-REI income, due to a very complex formula applied at sale.

[Paul Moore]

Hey @Sam Dal, the complexity of your question shows a depth of thoughtfulness on your part that is unusual among passive investors. Great job! It also reminded me that you…and all of us…need real estate-oriented tax strategists in our corner not just regular CPAs.

You got one of the best people I know in the US replying to your question in @Michael Plaks above. Michael, as always, I appreciate your detail and knowledge.

[Basit Siddiqi]

Suspended passive losses can be used to offset passive gains.