Tax implications of syndications

[Ari Bachrach]

I have invested in a few syndication deals in the last few years, and three of them are ending or have ended this year. How are the final distributions taxed? Assuming there's depreciation recapture, will the depreciation recapture and the final distribution amount be reported as regular income? net rental income? Long term capital gain? Something else? My intuition says long term capital gain, but I wanted to check so I can make sure to plan the rest fo the tax year appropriately.

[Ashish Acharya]

Originally posted by @Ari Bachrach:

I have invested in a few syndication deals in the last few years, and three of them are ending or have ended this year. How are the final distributions taxed? Assuming there's depreciation recapture, will the depreciation recapture and the final distribution amount be reported as regular income? net rental income? Long term capital gain? Something else? My intuition says long term capital gain, but I wanted to check so I can make sure to plan the rest fo the tax year appropriately.

Distributions are not likely taxed unless you have a basis issue. 

Yes, there will be unrecaptured 1250 (commonly called depreciation recapture here in BP) income to you via K-1. This will be taxed at the maximum rate of 25%. This is will not be taxed as regular income. However, if your marginal tax rate is less than 25% you will pay the same rate. In other words, it is the amount of long-term gain attributable to depreciation that is not required to be treated as ordinary income pursuant to the Section 1250 recapture rule

However, if there were cost seg done, there might be some 1245 and 1250 depreciation recapture. These recaptures are not as favorable as the Unrecaptured 1250 and are taxed as ordinary income.