The $1.8 trillion debt wall has a tax problem nobody is talking about

Multi-Family and Apartment Investing
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The $1.8 trillion debt wall has a tax problem nobody is talking about

Kasing Ng
Accountant · San Francisco, CA · Member since 2026 · 40 posts · 19 votes

You have seen the story everywhere this week. WSJ, CRE Daily, every feed. Roughly $1.8 trillion in multifamily debt coming due, refi rates about double the 2020 and 2021 loans, values off the peak. Everyone is covering the debt. Almost nobody is covering the tax.

The connection is simple. Owners who cannot refinance are being forced to sell or hand back the keys. Those forced exits are taxable events. The same wall wiping out equity is about to trigger a wave of tax bills, most of them modeled nowhere.

A distressed sale can trigger tax even at a loss. Recapture does not care that you lost equity. If a deal took cost seg or bonus depreciation, that basis comes back as income at sale, whatever the price. Section 1245 recaptures at ordinary rates, land improvements at 25 percent. In a down market there is little appreciation left to get the 20 percent rate, so the mix shifts higher. You can book a real loss and a taxable gain in the same deal.

A handback is worse. Debt forgiven through a deed in lieu or short sale can become cancellation of debt income or trigger gain from debt relief. So an investor takes a capital loss and an ordinary income pickup in the same year. Section 108 and the partnership rules offer exits, but they are fact specific and rarely modeled. We lost money so there is no tax is often wrong.

Buyers are walking into more tax, not less. The cash buyers grabbing distressed assets run heavy value add. Big renovation means big cost seg and bonus, which means big recapture at exit. If you are raising for one of these buys, your LPs see a pro forma that stops at pre tax. And it is not only their number. Your co-invest carries the same recapture, and if you signed recourse, a forced sale is personal.

LPs are done taking the pro forma on faith. After watching deals collapse with no recourse, the money is skeptical. LPs are starting to ask for an independent read before they wire. In this market a sponsor who can show an outside after tax projection has an edge raising, not a liability.

I am a CPA and former Big 4 fund auditor, and this is the gap I work: the after tax number the pro forma leaves out, before it hits the K-1. Not pitching anything, just flagging what I keep seeing go unmodeled.

For the group: on your last exit, or one you are underwriting now, did the exit tax get modeled before close, or show up on the K-1??

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  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    22h

    This is a big issue, and lots of LPs are going to be dealing with it first hand soon, if not already. And with extend and pretend seemingly coming to an end with lenders, the end of the road is likely coming for those sponsors that have successfully kicked the can down the road the last couple years on forced sales.

    That being said, while it is certainly good to model on a personal level, I can't help but read this post from an LP/GP perspective and assume you are asking if the GPs modeled tax implications into their own pro formas, especially since this wall of MF debt you are talking about is primarily held in large complexes that most of us cannot buy on our own.

    A GP cannot, and should not, be trying to model any LPs tax implications. When I talk to LPs, I will note what historical average K-1 pass through losses have been, due to bonus and accelerated depreciation, but always stop short of saying how it will impact any specific investor's taxes. I simply don't know if they are full W2, have REP status, have other investments that may limit their ability to recognize losses etc. And in terms of a pro forma, why would I ever model a deal with a net loss (taxable or otherwise) at the end?

    I look at all investments, whether it be stocks, real estate (passive or active), businesses, etc at the investment level, first. Tax implications have almost no impact on my analysis of whether I make an investment or not. In all areas, I tend to skew to long term holds, other than my flips, so tax implications are minimal, and a "cherry on top" more than anything else.

    As I have noted, a 30% return on a stock portfolio will beat the 10% return on real estate, pre and post tax.

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  • Kasing Ng
    OP
    Accountant · San Francisco, CA · Member since 2026 · 40 posts · 19 votes
    18h

    @Evan Polaski, thank you so much for reading it and providing your insights. Appreciate that, and I agree with most of it.

    You are right that a GP cannot and should not be modeling any single LPs taxes. You have no idea if someone is full W2, has REP status, or has outside passive income soaking up losses, so guessing at their number would do more harm than good. That is not what I am after. The read I am talking about sits at the deal level and does not care whose bracket it lands in.

    Here is the one thread I would pull on though. All that bonus and accelerated depreciation that gives your LPs those nice pass through losses early on does not just vanish. It comes back as recapture when the deal sells. And how much of that exit gain is recapture versus long term gain is a fact about the property, not about the investor. The pre tax IRR never shows it because it only hits at the sale, and it shows up even when the deal is a winner. That was the whole point I was getting at, not modeling some loss scenario.

    And on investment first, you get no argument from me. The return has to be there, and a good deal is a good deal. The after tax read does not change that. It just tells the LP what they actually walk away with, so the 12% IRR they got sold on is not suddenly an 8% IRR when the K1 shows up.

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  • G. Brian DavisPro Member
    Investor · Hatboro, PA · Member since 2016 · 2k+ posts · 845 votes
    10h

    This is a good point. We invest as a group of LPs, and we’ve seen how quickly an exit can change when the refinance assumptions stop working. When we vet a deal, we stress test the debt, ask what happens if the exit is delayed or the sale price falls, and look closely at the operator’s track record in tough situations.

    You’ve added a question we should ask more directly.. if that downside case happens, what could investors owe in taxes even if they get little or no cash back? I’d want the operator’s CPA to walk us through that on a deal promising large upfront depreciation deductions.

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    • Kasing Ng
      OP
      Accountant · San Francisco, CA · Member since 2026 · 40 posts · 19 votes
      9h

      Yeah, you just hit on the exact hidden risk. The ugliest version of owing tax on money you never see is debt relief. When the property sells or goes back to the lender, the loan that gets wiped out counts as cash in your hands as far as the IRS is concerned, even though not a dollar of it actually lands with you. Now stack that on a basis that years of depreciation already chewed down, and you can end up writing a check on a gain in a deal that felt like a straight loss.

      That is the whole reason the bad case needs its own after tax line and not just a footnote under the base case. What you asked, what do we actually owe if the exit flops and almost nothing comes back, is the one number a pro forma will never show you. And you are dead right that the operators CPA should be the one walking the group through it, on paper, before anybody wires money.

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  • Divin KanyamaBusiness Member
    Accountant · Seattle, WA · Member since 2025 · 168 posts · 46 votes
    8h

    @Kasing Ng this is an important point. Many underwriting models spend pages on debt, cap rates, and sale proceeds, but the after-tax outcome is often reduced to a footnote—or omitted entirely. Depreciation, cost segregation, suspended losses, debt structure, entity basis, and the character of the gain can produce a very different result from the headline equity loss. One nuance is that the outcome depends heavily on whether the debt is recourse or nonrecourse and on the investor’s basis and partnership allocations, so a distressed sale, short sale, or deed in lieu needs to be modeled deal by deal. Sponsors who provide an independent after-tax exit analysis would likely build credibility with LPs, especially if it includes downside scenarios rather than only the projected base case. In my experience, exit taxes are too often addressed late in the process instead of being incorporated into the underwriting before close.

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    • Kasing Ng
      OP
      Accountant · San Francisco, CA · Member since 2026 · 40 posts · 19 votes
      6h

      Divin this is a sharp add and the recourse vs nonrecourse split is the one that bites hardest in this wall.

      A deed in lieu or short sale on nonrecourse debt still throws off gain to the extent the debt exceeds basis, and after years of depreciation that basis is on the floor. Owner walks away with no cash and a tax bill anyway. Recourse stacks cancellation of debt income on top unless they are insolvent. Nobody prices that at acquisition because the base case never contemplates a forced exit, which is your whole point about modeling it deal by deal.

      Are you seeing operators actually run the distressed cases yet, or still only the base pro forma?

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