Tax question after sale of syndication

Tax, SDIRAs & Cost Segregation
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Tax question after sale of syndication

Account Closed
Member since 2021 · 1 post · 0 votes

When a real estate syndication is sold and you still have loss carryover from initial year 1 depreciation (cost segregation), can you use it to offset ordinary income on the year of the sale? And how?  (assuming not real estate professional tax status). Thanks. 

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

When a real estate syndication is sold and you still have loss carryover from initial year 1 depreciation (cost segregation), can you use it to offset ordinary income on the year of the sale? And how?  (assuming not real estate professional tax status). Thanks. 

Although the question is not very clear, yes the losses gets released and can offset your ordinary income unless you have done grouping election that can prevent the release of the suspended losses.  

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

    When a real estate syndication is sold and you still have loss carryover from initial year 1 depreciation (cost segregation), can you use it to offset ordinary income on the year of the sale? And how?  (assuming not real estate professional tax status). Thanks. 

    Although the question is not very clear, yes the losses gets released and can offset your ordinary income unless you have done grouping election that can prevent the release of the suspended losses.  

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5240 Reviews
    WebsiteView Page
    TaxMD® | Tax Planning Software
    WebsiteView Page
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  • Charles LeMaire
    Rental Property Investor · DFW TX · Member since 2018 · 179 posts · 260 votes
    5y

    This is a hard one to wrap your mind around.  I suggest you go to YouTube and search for "Passive Activity Loss & At-Risk Limits".

    I'm sure you have heard all the benefits of being a R.E. Pro.  Well it turns out that in the year one disposes of an asset (sale of the property), all of the previous depreciation on that property and all of the depreciation on other properties for that year are "released" to be used to offset the gain on the property and can be used on earned income.  I am not a CPA, just an investor that has also been trying to understand this.

    Regards,

    Charles LeMaire

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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    5y

    I believe you’re also going to owe 25% depreciation recapture tax. I’m assuming you didn’t sell at a loss of course. Hard to see how you end up at a net loss after selling.

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  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    5y

    All investors will have to pay back the depreciation recapture (losses taken throughout the hold) and capital gain (the big payout on the end which is sale minus cost basis). But don't despair because although this is the case when you look at it myopically, in reality most investors go into multiple deals accumulating 100s of thousands of passive activity losses in their first few years investing. Those losses do not go away, but they become suspended to be used to offset future passive income and sales/capital events like this in the future. When you exit a deal, what normally ends up happening (like Tom Brady keep winning more Super Bowls) is that you go into two more deals (with now double the amount of capital) and you will likely find that with those new K1s you could result in you having way more passive losses you began with If you can see where this is going... yes, experienced investors with a lot of capital deployed might have 500k-1M+ suspended passive losses and have not paid taxes in years and do not appear to pay taxes for years! (you can find how much suspended passive losses you currently have on your IRS Form 8582 - which your CPA is likely not giving to you and in that case you should get a new one)

    PS - I am not an CPA or attorney but I became financially free doing this for myself after 10 years working as a w2 engineer :

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  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    5y

    @Account Closed

    Yeah, we had this conversation before on BP.  Of course, consult a qualified professional..  But, basically as I recall seeing it on one of my returns, the carried over Passive Allowed Losses for that unit are taken in their entirety the year the asset is disposed.  All those losses show up on the SchE which make their way onto your 1040.  The calculation of the depreciation unrecapture is a little foggy.  I think its from a form referenced by SchD, f4797, or a "SchD related worksheet."

    Because the asset was disposed, i.e. sold, the Real Estate Professional Status has no bearing to my understanding.

    I think this addresses what you were asking.  Good luck.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    5y

    Most syndications operate on a 5-7 year hold.
    Most syndications will try to deploy some tax elections/strategies where they can show a tax loss for all years besides the last year.
    You will be able to unlock all the losses from that investment in the year of disposition.

    [email protected]917-280-8544
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