Tax Implications for Limited Partners in multifamily syndications

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Tax Implications for Limited Partners in multifamily syndications

Jay Yoo
Investor · Seattle, WA · Member since 2019 · 139 posts · 54 votes

First of all, thank you 🙏 much for your time in advance helping me understand the tax implications for multifamily syndication deals.

I would like to be informed as much as possible so I could answer any questions for my potential passive investors in the future. I know I dont need to know everything but that doesn’t make a good excuse since passive investors/ limited partners trust in you first before the deal itself.

Ok, thats too long for intro.

Sorry for multiple questions. I could find consistent answer from google as tax questions can be complicated.

What does a limited partner have to know about tax implications in a real estate syndication in general?

1. What are the returns for LP tax exemption at the sale or income monthly or quarterly from their pref return?

2. At the end of investment, capital gain from the sale will be taxed at 15%-20%. How could a LP avoid? 1031 exchange?

3. Plus the NIIT of 3.8% if applicable. E.g. Married filing jointly, $250,000 for those tax bracket 32% high income passive investors?

4. LPs will also pay depreciation recapture tax (up to 25%)

5. Does the return on investment deck prepared by operators usually include these tax implications on the return?

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
5y

@Jay Yoo

Answering LP's tax questions should be left to your CPA (or theirs). You already have plenty of liability and do not need to pile incorrect tax advice on top of it. You trying to learn about tax implications of syndications from Google and even from BP makes me worry for your future LPs. This is amateurish and unfair to your investors.

That said...

#1. Unclear question, cannot answer.

#2. LPs cannot avoid this tax with some group strategy, unless you keep the same group together and, as a group, exchange one syndicated investment for another. This is very rare. Individually, each LP might be able to mitigate their respective tax hit with their individual tax strategies, such as utilizing other losses or rolling the gains into a qualified opportunity zone fund. These options are very much case-by-case and are either not available or not suitable for some investors. Each of them needs their own tax counsel.

#3. Yes, higher-income passive investors may be subject to NIIT on their portion of capital gains from the eventual sale of the property.

#4. Don't think of depreciation recapture as a tax. Think of it as a reversal of the depreciation deduction previously taken. If your syndication claimed $1M of depreciation, splitting it between 10 partners, $100k each, then each partner receive $100k of depreciation deductions over the first 3 years of the syndication's life. You sell in year 4, and each partner will now pay tax on his $100k depreciation recapture - in effect, reversing the $100k of deductions taken previously.

#5. Syndicators do not, and should not, include tax implications in their presentation for LPs, due to the fact that the consequences vary from investor to investor, and due to liability for giving tax advice.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    5y
    Originally posted by @Jay Yoo:

    First of all, thank you 🙏 much for your time in advance helping me understand the tax implications for multifamily syndication deals.

    I would like to be informed as much as possible so I could answer any questions for my potential passive investors in the future. I know I dont need to know everything but that doesn’t make a good excuse since passive investors/ limited partners trust in you first before the deal itself.

    Ok, thats too long for intro.

    Sorry for multiple questions. I could find consistent answer from google as tax questions can be complicated.

    What does a limited partner have to know about tax implications in a real estate syndication in general?

    1. What are the returns for LP tax exemption at the sale or income monthly or quarterly from their pref return?

    2. At the end of investment, capital gain from the sale will be taxed at 15%-20%. How could a LP avoid? 1031 exchange?

    3. Plus the NIIT of 3.8% if applicable. E.g. Married filing jointly, $250,000 for those tax bracket 32% high income passive investors?

    4. LPs will also pay depreciation recapture tax (up to 25%)

    5. Does the return on investment deck prepared by operators usually include these tax implications on the return?

     Hi,

    - no

    [email protected]941-914-7779
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    2Reply
  • Jerel Ehlert
    Attorney · Austin, TX · Member since 2014 · 888 posts · 759 votes
    5y

    DON'T LISTEN TO ANYTHING YOU READ ON BP.

    Your situation is way too specific to your particular facts.  You need your own CPA who has your financial records.  Tax law is like that - only the most generic (and unhelpful) advice will be correct for you.  Everything else is just a guess because of all the conditional rules and carveouts related to all the other parts of your tax return.

    0Reply
  • Jay Yoo
    OP
    Investor · Seattle, WA · Member since 2019 · 139 posts · 54 votes
    5y

    @Jerel Ehlert  Thanks Jerel for your thoughtful response! Actually none of them are my specific cases but I would like to be informed incase I get these questions from any passive investors in the future. I could simply say "please talk to your CPA" but instead I would like to say "by no means, I'm not a CPA, but just my opinions here are general ideas,,,," 

    1Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    5y

    @Jay Yoo

    Answering LP's tax questions should be left to your CPA (or theirs). You already have plenty of liability and do not need to pile incorrect tax advice on top of it. You trying to learn about tax implications of syndications from Google and even from BP makes me worry for your future LPs. This is amateurish and unfair to your investors.

    That said...

    #1. Unclear question, cannot answer.

    #2. LPs cannot avoid this tax with some group strategy, unless you keep the same group together and, as a group, exchange one syndicated investment for another. This is very rare. Individually, each LP might be able to mitigate their respective tax hit with their individual tax strategies, such as utilizing other losses or rolling the gains into a qualified opportunity zone fund. These options are very much case-by-case and are either not available or not suitable for some investors. Each of them needs their own tax counsel.

    #3. Yes, higher-income passive investors may be subject to NIIT on their portion of capital gains from the eventual sale of the property.

    #4. Don't think of depreciation recapture as a tax. Think of it as a reversal of the depreciation deduction previously taken. If your syndication claimed $1M of depreciation, splitting it between 10 partners, $100k each, then each partner receive $100k of depreciation deductions over the first 3 years of the syndication's life. You sell in year 4, and each partner will now pay tax on his $100k depreciation recapture - in effect, reversing the $100k of deductions taken previously.

    #5. Syndicators do not, and should not, include tax implications in their presentation for LPs, due to the fact that the consequences vary from investor to investor, and due to liability for giving tax advice.

    3Reply
  • Jay Yoo
    OP
    Investor · Seattle, WA · Member since 2019 · 139 posts · 54 votes
    5y

    @Michael Plaks  Thank you for your thoughtful response Michael. You have already nailed all my questions to one answer. I will keep your points in mind, and simply better to say "Please talk to your tax professional". I found that this article online was informational for me and future LPs so I can answer some, but I will just keep this myself. 

    1Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    5y

    @Jay Yoo

    also watch https://www.therealestatecpa.c...

    0Reply
  • Jay Yoo
    OP
    Investor · Seattle, WA · Member since 2019 · 139 posts · 54 votes
    5y

    @Michael Plaks Thank you Michael, That's going to be my commute for the next few weeks! :)

    0Reply
  • Tushar P.
    Member since 2019 · 332 posts · 171 votes
    5y

    @Michael Plaks what happens when someone makes an investment as a co-GP (instead of LP), getting a share of the cash flow from fees during the hold period (asset mgmt fee, property mgmt fee, etc) - are these cash flows treated as long term capital gains / qualified dividends (15/20% taxation) or ordinary income (tax rate based on income)?

    A high IRR hurdle rate for the co-GP would mean that the entire cash flow from fees will be transferred to the co-GP every year (on top of the profits at exit). Quite attractive for the passive co-GP, unless the cash flows and profits are not treated as qualified dividends or long term capital gains.

    0Reply
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