Need a Real Estate focused CPA, unfortunate situation

10 Replies

So I have a tax situation that is unfortunately going to require me to have to terminate the services of a CPA and start over for tax year 2020. I am a MI resident, currently work overseas in Bahrain and take full advantage of the foreign earned income exclusion(FEIE) utilizing form 2555. 

I also invest passively in syndication deals that issue me a K-1. So my tax situation isn't super simple, but also not too complicated that a competent CPA who handles foreign earned income(from a US employer) and K-1s would struggle. I had a CPA that specializes in expats working overseas and he also handles K-1 forms(supposedly). He prepared/filed my taxes for 2019, he made a few small errors I discovered that were promptly corrected. No problem. I only had 2 K-1 forms for 2019 and both showed paper losses, he did not file state returns for either K-1 for 2019. He didn't apply any of the losses off my W-2 income(I'm not an active RE professional), which I didn't have an issue with as the FEIE is such a huge benefit I didn't make a fuss, I can carry the passive paper losses forward. 

Fast forward to tax year 2020 and I have 6 K-1 forms all showing a paper loss as well as still working overseas as a defense contractor. I submit all of my information to the same CPA. He sends me a draft copy of the returns as well as state returns for the LLC K-1s to preserve my loss carry forwards. It was a nightmare trying to make sense of it was so sloppy. He made the following errors just through a quick 30 minute scan, at least what I thought were:

1. Drafted state returns for K-1s in states where the sponsor is based for their general business as opposed to where the LLC syndication property is located. So he had drafted state returns for CA and NJ when the properties are located in GA and KY respectively. I owned up to messing this up as I didn't inform him that the K-1 didn't specify where the property is, only the mailing address for the GP sponsor in CA and NJ. He also left out other state returns to preserve losses in OR, GA and KY where I am invested. It doesn't make any sense that I would have to file in the state where the sponsor is doing their main business when the property LLC I am invested in is filed, registered and located in another state. If I am wrong about this, please tell me. He claims I have to file in those states as if the K-1 they issued was as if I am a general partner in a sponsor's main business vs a limited partner in a syndication in another state. If it was only this error I would not have terminated his services.

2. 1099 interest income from banks was mis-reported, a simple Ally Bank 1099-INT had individual CD interest income earned and then at the end of the pdf it had a composite for all interest income for all CDs/accounts. He only reported the interest income from 1 CD. A small easily correctable error, but troubling he didn't scroll down on the 1099-INT. Taken together with other errors I was not getting concerned.

3. Left out my 529 deduction to take a state tax deduction. He gave me a questionnaire prior to engaging his services that captures all of this. 

4. Miscalculated my form 2555 FEIE deduction for working overseas(The FEIE allows one to exclude from their income upto $107,600 for the 2020 tax year if they work and derive their income from working overseas). To qualify for this exclusion, 1 must either meet the bona fide residence test or meet the physical presence test. The physical presence test is much easier to satisfy, the requirement of which is one has to be overseas for 330 out of 365 days in any rolling 12-month period. If one uses a 12-month period to qualify that crosses calendar years, you have to allocate the portion in the corresponding tax years. He did not do this, he counted days from I used to qualify in 2021 for the 2020 tax year. This raises a huge red flag for audit risk. 

5. He took passive losses from 3 out of my 6 syndications and deducted it from my W-2 income(he deducted approx $19k from my W-2 income), and ignored the losses from my other 3 syndications. If I am not mistaken, isn't there a limitation of $25,000 to deduct passive losses from W-2 income but only if my MAGI is below $100,000 and completely phased out at $150,000? My MAGI(which unfortunately has to add back in the huge $100k+ foreign earned income exclusion) exceeds both of these thresholds so I don't believe I can have it deducted from my W-2 income. I am not an active RE professional either, so no benefit there. 

Taking all of these issues together, I didn't have any confidence in my return, it is completely unusable and I think I need to start over with another CPA who can handle it. Even if he corrected them, I question his competency now. So I have terminated his services and am on the hunt for a CPA that can handle real estate passive LP syndication K-1s as well as utilizing the FEIE form 2555. Any recommendations would be MUCH appreciated. Thank you. 

@Evan Loader

1. Your explanation is confusing to me. You or your tax preparer should not be guessing each state's share of K-1 income and expenses. This data must be clearly shown on each state K-1. For example, your Federal K-1 may show $500 of income, while your CA K-1 may show $300 of state income or a $100 loss. There should be a state K-1 for every state (with a state income tax) where the syndication has nexus, i.e. where it owns properties.

2. An easy error to make in a hurry. Can happen to anybody, but it should not happen with good systems in place.

3. Also easy to overlook, since it's a state-specific deduction. Sounds like your CPA might have been rushing it or used under-trained/under-supervised help.

4. Without seeing details, I'm not sure whether he calculated it wrong. The physical presence test is tricky. If your CPA specializes in expats, I'd expect him to be proficient in it.

5. Again, your explanation does not necessarily paint a full picture. For instance, you cannot take any of the $25k loss from syndication K-1s unless you own 10% of the investment. However, there could be a complex interplay between multiple K1s that can produce a visually deceptive result.

Bottom line: this return needs a second opinion. A thorough review may not be free. And most of us tax professionals are very busy at this time of the year.

Originally posted by @Michael Plaks :

@Evan Loader

1. Your explanation is confusing to me. You or your tax preparer should not be guessing each state's share of K-1 income and expenses. This data must be clearly shown on each state K-1. For example, your Federal K-1 may show $500 of income, while your CA K-1 may show $300 of state income or a $100 loss. There should be a state K-1 for every state (with a state income tax) where the syndication has nexus, i.e. where it owns properties.

2. An easy error to make in a hurry. Can happen to anybody, but it should not happen with good systems in place.

3. Also easy to overlook, since it's a state-specific deduction. Sounds like your CPA might have been rushing it or used under-trained/under-supervised help.

4. Without seeing details, I'm not sure whether he calculated it wrong. The physical presence test is tricky. If your CPA specializes in expats, I'd expect him to be proficient in it.

5. Again, your explanation does not necessarily paint a full picture. For instance, you cannot take any of the $25k loss from syndication K-1s unless you own 10% of the investment. However, there could be a complex interplay between multiple K1s that can produce a visually deceptive result.

Bottom line: this return needs a second opinion. A thorough review may not be free. And most of us tax professionals are very busy at this time of the year.

1. My apologies for the confusing explanation. Neither my CPA nor I was guessing as to the share of a state's share of a K-1. Each K-1 is standing on its own for each property/each syndication. The misunderstanding came because GP Sponsor A who is HQd in CA issued me a K-1 for a property that is based in GA with their business mailing address in CA showing on the K-1 as opposed to where the property is in GA, and the LLC was opened/registered in GA. My CPA drafted a return for CA claiming that is where I need to file for my LP share of a GA LLC and GA located property. I should not be filing any return to preserve loss carry forwards in CA just because GP Sponsor A has his main business there. My nexus is to the syndication property in GA and the LLC in GA. I should have clarified to the CPA when I sent original documents where each K-1 property is located.

The same goes for a property I am invested in KY. GP Sponsor B is HQd in NJ issued me a K-1 for a property that is located in KY but their mailing address on the K-1 shows their HQ in NJ, and the LLC was opened/registered in KY. Again, my CPA drafted a return in NJ claiming that is where I need to file for my LP share of a KY LLC and KY located property. My nexus is to the syndication property in KY and the LLC in KY. My only concern here is to preserve my loss carry forwards for when the deals exit and I can carry these passive losses forward to minimize state income taxes owed to the state where the property is located. I want nothing to do with either NJ or CA and their tax systems.

2. Easy error, I get it. This error alone was not the straw that broke the camel's back, but it didn't help. 

3. I believe he was rushing because I sent him the all documents on 1-April, once I had my last K-1. He downloaded them on 3-Apr. I followed up for a status on 19-Apr and 2 hours later he sent me this return. Something tells me he threw the return together as soon as I followed up, which led to some sloppy mistakes.

4. The CPA did calculate the number of days I was overseas correctly. The error he made was he allocated all 356 days I used to qualify for the 2020 tax year, when they have to be allocated for the tax years in which the calendar years they fall. Approx 50 days of the 356 I used to qualify were in calendar year 2021, so I have to wait until I file my 2021 taxes to take advantage of those days. There is prorated formula in 2555 that walks the preparer/filer through it. 

5. I didn't expect to have any of my K-1 losses deducted from my W-2 income because he didn't do it for my 2019 taxes, my MAGI is too high anyway as a passive investor to deduct anything, and the fact that he only deducted some of my losses from 3 of the 6 syndications just struck me as odd. At the end of the day I just couldn't in good faith agree to stay with that CPA. And I do not own 10% of any of the properties I am invested in, so good to know that info. 

The CPA responded to my termination message and said he was sorry I felt that way but offered to help if I needed his services again. Not sure if he just was too busy with other things or what, I did my homework on him and he had no major complaints filed against him in the state where he is based. Part of me wondered if he just was so overwhelmed or busy with other things that he purposely threw it together to get me to fire him, in my mind the errors were that blatant. I would hope it wasn't a circumstance like that.

 

@Evan Loader

We're still not on the same page as far as state K1s. You seem to be talking about one K1 per syndication. That would be a Federal K1 showing income/losses for the federal (IRS) taxation purposes. In addition to this K1, each syndication should provide you with state-specific K1s, one for each state where it holds properties. 

So, if you are invested in a XYZ LLC that holds two properties, one in CA and another in CO, you should receive three K1s: Federal, CA state and CO state, and all three of them will report different numbers. Your state returns prepared based on the state K1s and not based on Federal K1s and addresses of the sponsors or properties.

@Michael Plaks I am invested in 6 syndications as of year end 2020 with 6 different sponsors and none of them sent me state specific K-1s as a passive LP. I know some do a composite state return, but none of mine did or do.

Originally posted by @Evan Loader :

@Michael Plaks I am invested in 6 syndications as of year end 2020 with 6 different sponsors and none of them sent me state specific K-1s as a passive LP. I know some do a composite state return, but none of mine did or do.

Composite tax return is a completely different issue. This is when the partnership pays state taxes on behalf of the partners.

Ask your sponsors or their CPA firm for state K-1s. 

@Evan Loader

Michael is correct in that your state personal tax returns must follow the state issued K-1s. I am surprised how a CPA could prepare a state return without this document. As for the other errors made, either your CPA is sloppy, or your situation has gotten too complex for them. Consider hiring a new accounting firm who can assist you and advise you as to federal and state tax filing requirements.

@Evan Loader

Syndicators provide K-1's to investors for their investment in a syndication. 

At the very least, each investor will get a federal K-1. This form will tell you what your income is at a federal level.
If the syndication did business at a state level, you should also get a State K-1 telling you your activity within that state.

I.E. if you invest in a syndication that invests in Georgia.
You will receive a federal K-1 and a Georgia state form.

Things get tricky as some states don't have a state level income tax so even if your fund does business in a state such as Texas, there may not be a Texas equivalent K-1.

Some tax professionals who don't deal with syndication K-1's will often mistaken all the activity as the address of the LLC or partnership.

Regarding being able to offset the losses from K-1's against your other income, you may potentially not be able to do so if you are a passive investor without active participation and below a certain ownership threshold.

You may want to have a consultation with @Michael Plaks to help you with your taxes.

Originally posted by @Evan Loader :

@Evan Polaski @Brian Burke @AJ Shepard do you know what Michael is referring to with state specific K-1s? I have only ever received 1 K-1 for each syndication deal from all my deals.

Yeah, syndication sponsors should be sending every investor a federal K-1 and a state K-1 for each state in which that syndicate owns property, if that state has a state income tax.  So if I have a syndication that owns three properties, one in TX, one in GA, and one in AZ, I’d be sending out three K-1s to every investor: federal, GA and AZ (no TX because TX doesn’t have a state income tax).

If the investor lives in NJ or NY (and a few other states but I can’t remember which), I’d be sending that investor a fourth K-1:  one for their home state, because their home state requires a K-1 for all of their residents regardless of where the issuing syndicate is conducting business.

I’m surprised that you are invested in six different syndicates with six different sponsors and none of them are sending state K-1s. I send mine as one document (just a lot of pages) so maybe your sponsors are too?  Try scrolling through the pages to see if they are in there and you just didn’t notice?

Originally posted by @Brian Burke :
Originally posted by @Evan Loader:

@Evan Polaski @Brian Burke @AJ Shepard do you know what Michael is referring to with state specific K-1s? I have only ever received 1 K-1 for each syndication deal from all my deals.

Yeah, syndication sponsors should be sending every investor a federal K-1 and a state K-1 for each state in which that syndicate owns property, if that state has a state income tax.  So if I have a syndication that owns three properties, one in TX, one in GA, and one in AZ, I’d be sending out three K-1s to every investor: federal, GA and AZ (no TX because TX doesn’t have a state income tax).

If the investor lives in NJ or NY (and a few other states but I can’t remember which), I’d be sending that investor a fourth K-1:  one for their home state, because their home state requires a K-1 for all of their residents regardless of where the issuing syndicate is conducting business.

I’m surprised that you are invested in six different syndicates with six different sponsors and none of them are sending state K-1s. I send mine as one document (just a lot of pages) so maybe your sponsors are too?  Try scrolling through the pages to see if they are in there and you just didn’t notice?

@Brian Burke I went back and looked at each(6) of my 2020 K-1 and each has a state form.  Thanks for setting me straight, shame on me for not looking beyond the first 2 or 3 pages of the document. @Michael Plaks I have the documents, so will follow up with you.