Rental Property Investor · West Des Moines, IA · Member since 2018 · 447 posts · 64 votes
Hi,
I am considering a syndication investment with 80% bonus depreciation on the first year.However as I understand the depreciation has tax advantages over passive income only but not on regular W2 income.
Had passive income for this year 2023 which is already being covered through 'passive losses' of another investment. If I take up this investment now can I carry forward and offset yo next year this new and additional 80% bonus depreciation? Ppease note Next year I will either have capital gains through sale of real estate or passive rental income.Appreciate your inputs.
I guess form 8582 needs to be filed and it seems like New Jersey the state where I moved early this year does not allow passive loss carryovers and requires losses be taken against gains in the same year that they are incurred and I think federal carries over.
Oh boy, please don't bring states into this. It's a royal mess.
Correct, New Jersey has unique rules prohibiting carryforwards. California does not allow bonus depreciation, to begin with. Every state with state-level taxation has their own quirks.
Real Estate Consultant · Denver, CO · Member since 2021 · 666 posts · 389 votes
2y
@Peter Morgan Discuss this with your CPA/tax professional. If he/she is not RE savvy, and you need more guidance, let me know. A couple things to know, passive losses can only offset passive gains. Grouping is an option when you want to use passive losses against passive gains on a different property. Yes, bonus depreciation can be rolled forward from year to year until used completely. Be aware that when the property is sold in a syndication, usually in 5 years, you will likely owe taxes on the depreciation you have taken. That is why you need a good RE CPA or tax attorney.
Odd that nobody answered your question before, but I guess it's because it came right before the Oct 15th IRS deadline when all of us tax accountants were swamped.
Anyway, the short answer is yes. The long answer needs to correct your statement first. you don't carry forward depreciation, you carry forward losses. Depreciation is one of the components of a loss.
Let's take an example. You have a rental property with $10k rent and $15k of expenses, including depreciation. Your W2 income is above $150k. So you have a $5k loss that cannot be used this year and carries forward to 2024.
Now you invest in a syndication that produces a $20k loss, mainly because they did cost segregation. OK, so now you have $5k "extra" loss from your rental plus $20k from K1. You carry $25k forward to 2024.
If you sell your rental in 2024, the entire $25k will be applied against the capital gain.
Specialist · Scottsdale, AZ · Member since 2014 · 626 posts · 700 votes
2y
@Peter Morgan yes, the passive losses you would get on your K1 from a syndication would carry over to subsequent years. Look at it like having many arrows in your quiver that you can use if you have passive gains to offset. If you use some of the arrows, then there would be a recapture of those arrows when the property is sold in the future. The good news is the recapture occurs at a flat rate (currently 25%) so depending on your tax bracket, that may be more favorable to you. On top of that, you have the time value of money invested working in your favor, allowing you to defer tax payment in the future when the property sells. And if your situation doesn't create enough qualified passive gains to offset all the passive losses, then you only have recapture on the losses you use. In other words, if you don't use some of the arrows, then there would be no recapture on those arrows.
Rental Property Investor · West Des Moines, IA · Member since 2018 · 447 posts · 64 votes
2y
@Michael Plaks
Thank You! :)
This is very helpful information, I am considering a fund, where the investment offers 80% bonus depreciation the very first year, 60% next year and it will eventually taper off reducing 20% every year as far as I understand , I guess form 8582 needs to be filed and it seems like New Jersey the state where I moved early this year does not allow passive loss carryovers and requires losses be taken against gains in the same year that they are incurred and I think federal carries over. The investment makes more sense when there are capital gains or passive income as cover but I feel some what blocked doing the math to validate if the investment makes sense knowing well before hand there won't be any state tax carryover.
I guess form 8582 needs to be filed and it seems like New Jersey the state where I moved early this year does not allow passive loss carryovers and requires losses be taken against gains in the same year that they are incurred and I think federal carries over.
Oh boy, please don't bring states into this. It's a royal mess.
Correct, New Jersey has unique rules prohibiting carryforwards. California does not allow bonus depreciation, to begin with. Every state with state-level taxation has their own quirks.
Rental Property Investor · West Des Moines, IA · Member since 2018 · 447 posts · 64 votes
2y
@Michael Plaks
Got it! carrying forward losses from bonus depreciation is still a very powerful tax strategy, as @jack Martin beautifully put it as an arsenal of arrows in the quiver inspite of the state tax quirks. Thank you!! this is very helpful.