Can we take Syndication Depreciation (loss) to offset Stock Gains?

Question

Hi Pros,

I invested in a Self-storage syndication (Ohio) and received an accelerated depreciation loss (K1) from the syndicate management. I want to find out if we can offset the depreciation loss from the self-storage (K1) against the passive short-term gains from stock investing.
Appreciate your valuable insights!

Thanks,
Mahender Bist
California

Josh Robertson · Answer

Hello Mahender, while it seems like you should be able to take the gains from the sale of stock against the losses from your syndication investment as they are both passive, that is not the case.  This is because income from the sale of stocks, and other securities, as portfolio income under the current tax regulations.  Due to this distinction that the IRS draws you are not able to take the gains from the stock sale capital gains against the losses from depreciation for the syndication investment.

Stephen Nelson · Answer

Suspended passive losses get released or "unsuspended" when the taxpayer disposes of the activity.

Stephen Nelson · Answer

Sorry if I didn't do a good job explaining this here.

Maybe the easier way to think about this is, REPS means real estate rentals aren't automatically passive activities. But REPS doesn't mean material participation doesn't matter.

E.g, a full-time self-employed realtor is a REP. But that doesn't mean a rental property she or he owns is automatically nonpassive. The realtor still needs to materially participate in the rental to use losses.

Same thing for syndications. A full-time self-employed realtor is a REP. But that doesn't mean the realtor can take passive losses spun off by the partnership.

For the record, I regularly see financial planners sell syndications to realtors based on the mistaken idea realtor can use the losses.

Stephen Nelson · Answer

This isn't correct. REPS status only means real estate rental activities aren't automatically passive.

But the taxpayer, even if he or she is a REP, still needs to materially participate in the thing generating the losses.

For what it's worth, a few months ago, I saw some advertising saying you could do this. They later stopped. Pretty sure someone pointed out they'd gotten this all wrong.

Ashish Acharya · Answer

@Mahender Bist Unfortunately, depreciation losses from a real estate syndication (via a K-1) are considered passive losses, while stock gains—whether short- or long-term—are considered portfolio income, not passive. Under IRS rules, passive losses generally can’t offset portfolio income, including gains from stocks.Unless you qualify as a real estate professional or meet specific exceptions (like material participation in a short-term rental), those losses will carry forward and can only be used to offset future passive income or gains from the sale of the syndication interest. That said, those carryforward losses still have value in future years.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Dylan Brown · Answer

Hey Mahender,

Great question—and you’re thinking about it the right way.

Since you’re a passive investor in the self-storage deal, those K-1 depreciation losses are considered passive under §469. And because stock gains (even short-term) are not passive income, you can’t use the real estate losses to offset them.

But—those losses aren’t gone. They’re just suspended and carried forward until you have other passive income to offset (e.g. rental profits from another deal). And when the syndication eventually sells the asset, any remaining passive losses from that activity are fully unlocked and can offset all types of income—capital gains, W-2, etc.

This is where working closely with your advisor can really pay off. There are ways to plan around timing—like realizing gains in years when you have passive income or triggering a disposition event—to make better use of those losses and improve your overall after-tax return.

Hope that helps clarify things.

Greg Scott · Answer

If you have Real Estate Professional Status (REPS - a specific IRS designation not a "do you invest in real estate" question) you can deduct 100%.  If you are not, it depends on your income and you are capped at $7K.

Mahender Bist · Answer

Thank you, everyone. The answers gave me a lot of clarity, and I really appreciate your valuable insights.

Stephen Nelson · Answer

To use the mini-storage losses to shelter other income, the losses need to be nonpassive.

The losses are not nonpassive just because the investor is a real estate professional. He'd need to be a real estate professional and materially participate in the ministorage business to make real estate losses nonpassive.

Mahender Bist · Answer

Thanks for your answers. I want to clarify further. I am a passive investor in the Self Storage Syndication (from which I got a depreciation K1 25K)while I hold a REPS status. I am a passive stock investor with an annual gain of 250K (for example). I don't have any profit from RE transactions, and I am passing all the losses via K1 as an active investor (40K Loss).

I want to see if I can Syndication depreciation can also be deducted from the passive gains from stocks?

Can we take Syndication Depreciation (loss) to offset Stock Gains?

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