Syndication Tax Question

13 Replies

Hello,

Some clients have been interested in investing in a syndication deal using their self directed IRA funds. When discussing it, the following came up that I'm very curious about.

If I'm a general partner/sponsor of a syndication, can I control how much depreciation is given to investors/limited partners? The reason I ask is because a handful of clients that are interested in investing are using self-directed IRA funds (through Pensco or Entrust), and therefore cannot take advantage of the depreciation - being that its retirement money and they don't have deductions/losses to use.

That being said, is there a way to use the depreciation that they “can’t” utilize, and let benefit the investors that can use it?

@Sam Liberow As a general rule, always verify with a CPA! 

From my past experience, GP cannot control the depreciation allocation to investors. Depreciation is allocated to an asset, not to investors. Once a specific amount is calculated based on the method chosen by an account (straight line or double declining or something else), it is then allocated to all investors in the deal based on their participation amount.

On other hand, while they cannot utilize the depreciation immediately the losses are carried forward and can be netted against gains that may be coming down the road. 

Lastly, keep in mind if your investors are using their SDIRA accounts to invest into debt-financed real estate they may potentially incur taxes on the portion of the investment that was financed (based on their percentage participation in the partnership.)

To reiterate, this is just my understanding. You must confirm it with your (or your clients') CPA!

Feel free to PM me if I can be of further assistance. 

Best of luck!

@Alina Trigub

One correction. Yes, SDIRA accounts can be taxed on debt-financed real estate if they buy real estate directly and borrow money directly. In this case, an SDIRA invests cash into a business as a partner, so there're no issues with debt financing. The financing happens inside the partnership, not inside the SDIRA.

Originally posted by @Alina Trigub :

@Michael Plaks Are you saying that as a partner in a partnership, that purchased a property with financing, a partner will not incur UBIT?!

Correct. The partner does not own a property, he owns an interest in a partnership - which is not financed. To rephrase it, the SDIRA did not borrow any money for its investments.

Originally posted by @Sam Liberow :

Hello,

Some clients have been interested in investing in a syndication deal using their self directed IRA funds. When discussing it, the following came up that I'm very curious about.

If I'm a general partner/sponsor of a syndication, can I control how much depreciation is given to investors/limited partners? The reason I ask is because a handful of clients that are interested in investing are using self-directed IRA funds (through Pensco or Entrust), and therefore cannot take advantage of the depreciation - being that its retirement money and they don't have deductions/losses to use.

That being said, is there a way to use the depreciation that they “can’t” utilize, and let benefit the investors that can use it?

There is a whole, fairly complicated subset of tax law that deals with economic substance and all that, but to keep things simple, no you cannot specially allocate depreciation simply to get a better tax result.  The IRS really does not like it when something is done purely to minimize taxes (there has to be a business purpose and economic substance).

Originally posted by @Simon Filip :

If an LLC that owns leveraged rental real estate includes a partner that is an SDIRA, the rules for UDFI extends to those partners.

Interesting. I will appreciate if you show me the support for your statement. Also, how would it be reported and/or enforced if all the SDIRA receives is a K-1 which has no place to indicate leverage?

Originally posted by @Simon Filip :

@Michael Plaks   the partnership should provide the necessary information in a K-1 footnote to it's tax-exempt members, similar to UBIT. 

See IRC 512(b)(4) for support.

Sec. 512 does not directly address the issue of ownership via partnership interest. Inconclusive. Anything more specific? 

Sam, you may want to keep pursuing this. I don't know how it works and I'd be surprised if your fact pattern is the right one to make it work but I have heard that the partnership agreement can specify the allocation of depreciation and this is done with some syndications.

Originally posted by @Mike Dymski :

Sam, you may want to keep pursuing this. I don't know how it works and I'd be surprised if your fact pattern is the right one to make it work but I have heard that the partnership agreement can specify the allocation of depreciation and this is done with some syndications.

Between the active partners and passive partners - yes. Not easy but doable. Between passive partners, the only difference being one is SDIRA and the other is cash - no.