Depreciation as an LP Sweetener — How Are You Using It?

[Daniel Sehy]

One theme I’ve been diving into with other operators is how depreciation is being positioned as part of LP returns. In some cases, it seems just as powerful as cash flow in attracting and retaining investors.

Some approaches I’ve heard:

• Accelerated cost segregation studies to front-load benefits

• Positioning depreciation as a “tax shield” in the first 5 years

• Using depreciation to offset K-1 surprises and smooth distributions

Curious, for those of you structuring syndications or partnerships:
1.Are you actively using depreciation as a lever when talking with LPs, or does it just show up as a bonus?
2.What’s worked (or not worked) when explaining this to investors?

[Michael Plaks]

@Daniel Sehy

Most syndication sponsors grossly misrepresent the benefits of depreciation to their passive investors. Save for some relatively rare circumstances, such as other investments with net-positive K1s, K1 losses are useless to the majority of these investors. And even when they are useful, the tax benefits are only temporary because they are typically reversed upon exit from the property. 

Of course, everything in taxes is case by case, but I'm sick and tired of explaining to frustrated high-W2 doctors and other high-income earners why their taxes are not going down like the sponsors "promised" them.

More here:
https://www.biggerpockets.com/forums/51/topics/839015-are-sy...
https://www.biggerpockets.com/forums/51-tax-legal-issues-con...