LP In Syndication | losses from Syndication & W2 income
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CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
5y@Ashish Acharya @Michael Plaks
Ashish correctly points out that LPs are subject to more specific rules, however the courts have found that a limited liability company (LLC) interest is not treated as a limited partnership interest. A taxpayer may establish material participation in an LLC interest via any of the seven tests. See Garnett,132 T.C. 368 (2009), and Thompson,87 Fed. Cl. 728 (Fed. Cl. 2009).
Taxpayer is a REP, materially participated in their own rentals, and can make the grouping election to treat all interest in rental real estate activities as one. There shouldn’t be concern about being an “LP” and there’s no issue with not materially participating in the entity as the grouping election would be made.
Am I missing something?
17 Replies
- 5yAshish AcharyaBusiness MemberCPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
Originally posted by @Gaurav A.:
Context: My spouse is a real estate professional by materially participating in the management of multiple Single family Residential.She spends more than 750hr and keep a methodical record oh the activities. Plus this is more than 50% of her work activity. We file our taxes jointly. All good there.
Question: Now I have also started to participate in real estate syndications as an LP. Can we takes losses from syndications (as a LP) and deduct those losses from our W2 income, Based on the fact that my spouse qualifies as a real estate professional?
I have been told that this can be done, but I am not sure how.
Any guidance will be helpful.Potentially, but highly unlikely. This gets complicated with two sets of participation rules for limited partners and individual taxpayers. Have you asked this question to your tax advisor? If this gets confusing please talk to them.
See below for the detail, but here is the summary:
You can group the LP interest, but now you have to meet (unless De Minimus applies) the limited partner's material participation rules, and most of the LP in syndicated deals fail the test. Limited partner tests are not as expansive as non-limited partner tests.
Limited Partner Interests in Rental Real Estate ActivitiesIf a taxpayer elects under Reg. § 1.469-9(g) to treat all interests in rental real estate as a single rental real estate activity, and the taxpayer holds at least one interest in rental real estate as a limited partnership interest (as defined in Reg. § 1.469-5T(e)(3), the combined rental real estate activity is treated as a limited partnership interest of the taxpayer for purposes of determining material participation.
Thus, the taxpayer is not treated as materially participating in the combined rental real estate activity until the taxpayer materially participates under the tests for determining the material participation of a limited partner.
Limited partner's test:
(Only three test -Under temporary regulations, individuals who are limited partners and meet the more-than-500-hour test, the five-of-10-years test, or the three-year lookback test are treated as materially participating in any activity of the limited partnership for purposes of applying the passive activity rules)
De Minimis RuleIf a qualifying real estate professional aggregates activities into a single rental real estate activity and the taxpayer’s share of gross rental income from all of the taxpayer’s limited partnership interests in rental real estate is less than 10% of the taxpayer’s share of gross rental income from all of the taxpayer’s interests in rental real estate for the tax year, a de minimis exception applies—the taxpayer can determine material participation under any of the tests in Reg. § 1.469-5T(a) that apply to the rental real estate activities.
INVESTOR FRIENDLY CPA®4.9242 Reviews - Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes5y
Disclaimer - I am not an CPA or attorney but I became financially free doing this for myself after 10 years working as a w2 engineer :( and I am sick and tired of seeing highly educated and hard working professionals getting stuck in the rat race because we deserve financial freedom and the option to do more with it.
If you are able to implement a real estate professional status tax strategy (REP) you can use passive losses from syndication deals to lower your ordinary W2 income. If not (ie two full-time working spouses) your only other option is going into land conservation deals, solar deals, or oil and gas deals - all of which have some risks.
Explained in a different way...
1) There are ordinary/W2/active income on one side. Lets call that the :( side.
2) And there is the happy side... passive income (syndications, passive partnerships ie medical/dentist offices) and passive losses (depreciation, bonus depreciation via cost segregations common in syndications). You can you passive losses to neutralize/eliminate passive income. Thats what this is the good side and why passive losses are called PALs too for passive activity losses.
So there is a barrier between 1) Active Income and 2) Passive Income above. You cannot offset passive losses (PALs) for active income. UNLESS you are are real estate professional status for tax designation purposes and able to create a "grouping/active participation". I get frustrated because most people a) don't stick with this and try to learn it... trust me its easier than first year college physics... but it will take you a few times to get it and after networking with real people doing this or b) they say its seems risky and listen to their lazy/ignorant CPA who by the way has been stuck in they same occupation for 20-30 years... why would you want to take financial advice from someone who is not financially free. - Real Estate Syndicator · Phoenix, AZ · Member since 2018 · 903 posts · 1k+ votes5y
@Gaurav A. Yes. In fact, this is a very similar setup that my wife and I have in our filing. I also am not a CPA but I do work with CPA's that give me the guidelines and rules with which I can use this strategy. What you've described is the sweet spot, where one spouse is able to meet the requirements as real estate professional and the other has a W-2 salary. As mentioned above, it's a grouping of income that is needed.
There most assuredly are some things to be aware of and some rules to abide by. That's why its important to work with CPA's who do this day in and day out. I recommend watching Real Estate CPA recent 4 video series on this. Title on Youtube starts with "REPS". Hope that helps!
- 5yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
I share your sentiment: yes, REP is "the sweet spot" for some landlords. However, you missed the specifics of the question: it was not about just rental losses, but losses transferred to you via K-1 as a passive investor in a syndication. It's a far more complicated issue than REP in general.
"why would you want to take financial advice from someone who is not financially free"? Because the question was not about becoming rich but about a highly technical aspect of the tax law. Even Warren Buffet and Elon Musk consult professionals.
As @Ashish Acharya explained, it potentially could be done, however it's not an automatic yes/no. Good question for your accountant, who should be very proficient with Section 469 of the IRS code. Trying to learn it online and apply on your own is risky. Even professionals find this topic very complex and challenging to interpret. Choose a strong tax expert for your team.
- 5yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Brandon is correct, but his answer is incomplete. There're important details as @Ashish Acharya pointed out.
Ted is also correct - if we're talking about a syndication investment on its own. He was not discussing a K-1 piggybacked on other rental properties owned directly, as you have.
Syndicators have a vested interest to say yes, whether or not it is a good answer. Besides, they often see it from their personal angle, because they satisfy material participation as sponsors. Their passive investors like you are in a different game.
This is why asking such questions online is not a solution. Whoever answers them needs the full context of the question and your entire tax and financial situation. Otherwise, the short snippets you receive appear contradictory, even when everybody is correct within their own context.
- CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes5y
@Ashish Acharya @Michael Plaks
Ashish correctly points out that LPs are subject to more specific rules, however the courts have found that a limited liability company (LLC) interest is not treated as a limited partnership interest. A taxpayer may establish material participation in an LLC interest via any of the seven tests. See Garnett,132 T.C. 368 (2009), and Thompson,87 Fed. Cl. 728 (Fed. Cl. 2009).
Taxpayer is a REP, materially participated in their own rentals, and can make the grouping election to treat all interest in rental real estate activities as one. There shouldn’t be concern about being an “LP” and there’s no issue with not materially participating in the entity as the grouping election would be made.
Am I missing something?
- 5yAshish AcharyaBusiness MemberCPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
Originally posted by @Brandon Hall:
@Ashish Acharya @Michael Plaks
Ashish correctly points out that LPs are subject to more specific rules, however the courts have found that a limited liability company (LLC) interest is not treated as a limited partnership interest. A taxpayer may establish material participation in an LLC interest via any of the seven tests. See Garnett,132 T.C. 368 (2009), and Thompson,87 Fed. Cl. 728 (Fed. Cl. 2009).
Taxpayer is a REP, materially participated in their own rentals, and can make the grouping election to treat all interest in rental real estate activities as one. There shouldn’t be concern about being an “LP” and there’s no issue with not materially participating in the entity as the grouping election would be made.
Am I missing something?
@Eamonn McElroy, adding you as we don't want you to miss out on all this fun.:)
Nice to see you back here Brandon.
Courts focused on the nature of the limited partners in the LLC. The whole issue was if you are LLC members (involved in management) or LLP members are considered limited partners for 469? (If they are in fact limited partners in LLC, they are subject to Limited partners provision I mentioned above in the first reply)
Thompson applicability is somewhat limited even in the LLC's world (not LP in the syndicated deal) in that it involved a taxpayer who was both a 99% direct owner in an LLC and its only manager. Thus, there was little question that the taxpayer materially participated in the management of the LLC. And the court ruled that you can be a limited partner in an LLC and are not subject to the limited partner's rule for PAL. Court didn't say that LP in the LLC can use expanded 7 test material participation rules if you are the LP (most of the LP in the syndicated deals are not the same as LLC manager members) in an LLC.
Also, the cases such as Thompson It not applicable here. We are not talking about a person being an LLC member (manager) and materially participating in the activity. The issue in these cases was just because you are a limited partner in the eyes of the LLC world, you are not a limited partner for PAL. Which I agree.We are talking about the limited partner in syndication with no management duties. Limited Partner in syndicated deals vs. LLC member (Limited partner from a legal standpoint but with management duties)
Becuase of the LLC's limited partner's confusion, under the proposed regulations, subject to an exception noted below, an interest in an entity would be treated as an interest in a limited partnership under Code Sec. 469(h)(2) if:
- -the entity in which the interest is held is classified as a partnership for Federal income tax purposes under Reg § 301.7701-3; and
- -the holder of the interest does not have rights to manage the entity at all times during the entity's tax year under the law of the jurisdiction in which the entity was organized and under the governing agreement. [This would apply to the member manager of the LLC]
Under the exception, an individual would not be treated as holding an interest in a limited partnership as a limited partner for his tax year if he also holds an interest in the partnership that is not an interest in a limited partnership as a limited partner, such as a state-law general partnership interest, at all times during the entity's tax year ending with or within his tax year (or the portion of the entity's tax year during which he directly or indirectly owns the interest). Prop Reg § 1.469-5(e)(3)(i) .
- The LP's we are talking about are not involved in management, so under the proposed regulation, most of the LPs in the syndicated deal are subject to my first reply (3 test provision).- If you are an LLC member but are a manager or have management rights, then you are not limited partners for sec 469.
Let me know if you guys think otherwise.
INVESTOR FRIENDLY CPA®4.9242 Reviews - CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes5y
@Ashish Acharya no I think we're on the same page. My point in citing those cases was that we shouldn't automatically assume an LLC member is subject to Sec 469(h)(2).
Still, taxpayer is a REP and materially participates in their own rentals. Based on the facts posed, I presumed the only activity was managing the rentals in which they said they exceed 750 hrs. They make the election to aggregate all rental activities. How are the LP losses treated?
- Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes5y
There's a few good cases on this subject under IRC Sec 1402 as well. Although the legislative history is different, it's helpful in this situation to examine that case law body.
I believe the courts today would agree with and implement a functional equivalence test that examines state law, the operating/partnership agreement, and defacto treatment and actions of the member/partner. And, that's usually what I advise on when we encounter these challenges. For example, we might want to find that an LLC member in a rental real estate syndication is NOT the functional equivalent of a limited partner under IRC Sec 469. On the other hand, we might want to find that another LLC member in a hotel syndication IS the functional equivalent of a limited partner under IRC Sec 1402.
I generally agree with Ashish on Thompson. Garnett is a little incomplete but that shouldn't be surprising as it's from 2009. There are better and more recent cases, particularly on the 1402 side.
I think we can all agree that an LLC member is not automatically the functional equivalent of an LP based on any one facet of fact and circumstance. A holistic examination of the facts and circumstances is required.
- 5yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Originally posted by @Brandon Hall:
@Ashish Acharya @Michael Plaks
Ashish correctly points out that LPs are subject to more specific rules, however the courts have found that a limited liability company (LLC) interest is not treated as a limited partnership interest. A taxpayer may establish material participation in an LLC interest via any of the seven tests. See Garnett,132 T.C. 368 (2009), and Thompson,87 Fed. Cl. 728 (Fed. Cl. 2009).
Taxpayer is a REP, materially participated in their own rentals, and can make the grouping election to treat all interest in rental real estate activities as one. There shouldn’t be concern about being an “LP” and there’s no issue with not materially participating in the entity as the grouping election would be made.
Am I missing something?
Why, yes, you are missing something. The Mother's Day Sunday when we're supposed to honor our mothers and wives instead of talking taxes. Alas, so am I and the rest of the gang, and here we are. :) Glad to see you chime in, my friend.
WARNING FOR NON-CPAs: READ THIS THREAD AT YOUR OWN RISK. THIS WAS MEANT FOR TAX GEEKS ONLY.
Brandon, I'm getting more cautious lately with peer discussions of technical details on BP, which used to be a habit of mine. Nobody but us enjoys it, and it results in one of the two bad outcomes: either we confuse the heck out of investors, or they run away with a dangerous simplistic conclusion that Brandon/Michael/Ted/whoever else said Yes/No - when very rarely these debates have a yes-no conclusion. Otherwise they would not be debates at all, right?
Which is why I was kinda wishy-washy in my response to the OP, saying this:
"...it potentially could be done, however it's not an automatic yes/no. Good question for your accountant..."
And it seems like we all share this sentiment.
Discussing these specific cases and other cases would be fun, but it's probably best done outside the forum. I, for one, would absolutely love to continue this conversation with all of you guys via our peer group email, preferably after the tax deadline.With clients, each of us would surely advise case-by-case. One of the issues I would certainly discuss with my clients who pursue REP/K-1 and cannot meet one of the 3 LP tests, is the fact that the IRS ATG takes a very firm stance that LLC=LP for 469 purposes:
"Since each member of an LLC has limited liability, investors are analogous to
limited partners under IRC § 469. For purposes of passive loss rules, LLC
members are treated as limited partners, even if the taxpayer is a member-manager."Obviously, ATG is not the law, but it's something to keep in mind while assessing risks.
PS. Brandon, I have a personal favor to ask for, while you're on the forum. Mind chiming in on my pet peeve topic here: https://www.biggerpockets.com/... ? TIA.
- CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes5y
@Michael Plaks amen! Appreciate you and everyone else for jumping into the conversation.
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes5y
Yea just talk with @Brandon Hall
I did his tax court and it make me just enough dangerous to be aware of this stuff. I think that is important for you to know but ultimately it has to be blessed by your CPA.
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes5y
*I did his tax "course"
Originally posted by @Eamonn McElroy:
There's a few good cases on this subject under IRC Sec 1402 as well. Although the legislative history is different, it's helpful in this situation to examine that case law body.
I believe the courts today would agree with and implement a functional equivalence test that examines state law, the operating/partnership agreement, and defacto treatment and actions of the member/partner. And, that's usually what I advise on when we encounter these challenges. For example, we might want to find that an LLC member in a rental real estate syndication is NOT the functional equivalent of a limited partner under IRC Sec 469. On the other hand, we might want to find that another LLC member in a hotel syndication IS the functional equivalent of a limited partner under IRC Sec 1402.
I generally agree with Ashish on Thompson. Garnett is a little incomplete but that shouldn't be surprising as it's from 2009. There are better and more recent cases, particularly on the 1402 side.
I think we can all agree that an LLC member is not automatically the functional equivalent of an LP based on any one facet of fact and circumstance. A holistic examination of the facts and circumstances is required.
Wow, great nerdy discussion from the expert CPAs 😍
On another note, regarding my post several months ago (about 2019 tax filing and K1 issues): https://www.biggerpockets.com/...
I have gone back to PwC to file the 2020 tax return. They had filed my taxes for years 2016-2018, and prior to that Deloitte had filed the taxes for 2013-2015. Will post what PwC does on the losses from several K1s and any state tax filing requirements, but that will be after October.- Investor · San Jose CA · Member since 2018 · 114 posts · 73 votes2y
This is probably my favorite forum post on bigger pockets OF ALL TIME - because I am a W2 earner and my wife is a REP.
I was hoping to invest in syndication this year and use the K-1 losses against my W2 income by grouping all of my rental activities with the syndication losses. (Aka - "piggybacking" my K1 losses on my rental property portfolio)
I've probably read this thread 5 times, but it's too technical to understand.Assumptions:
1. My spouse is a REP (1099 - Real Estate Agent)
2. I am a W2 earner
3. We materially participate (500 hours) in our small portfolio of rental properties this year
4. I invest in a syndication and receive a K-1 showing a 100k loss
Question: What additional steps would I need to take for me to be able to use my 100k loss from my K1 and use it to reduce my active household income?@Brandon Hall
@Ashish Acharya
@Michael Plaks
PS. I've worked with @Ashish Acharya as my CPA for the past couple of years so I could just ask him but I'd like to have a response on this public forum as well to help out others. - 2yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votesThe answer is yes, and an explanation is here: https://www.biggerpockets.com/forums/51-tax-legal-issues-con...
Quote from @Michael Hyun:
This is probably my favorite forum post on bigger pockets OF ALL TIME - because I am a W2 earner and my wife is a REP.
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