All Forum Posts by: Tushar P.

@Chris Montgomery so you are saying that OZ tax benefits are not eroded/lost if the refinance is done 2 years after the investment was made and the distribution does not exceed the invested gains, right?

Assuming someone invested $100k of capital gains in a QOF in 2019 and then refinanced in 2022 (assume increase in basis to $110k), with $100k distributed back to the investor - does this mean the basis in QOF is now $10k, and taxes are due on $100k (no basis step up). If yes, then there is clear erosion of the OZ tax benefits, which brings me to the original question: what is the point of complying with the OZ guidelines if the tax benefits are eroded/lost?

If the tax benefits are indeed eroded, then I don’t understand the point of doing refinance.

@Chris Montgomery so if you pull money out after 2 years then you will still owe taxes on 85% of the capital gains that were invested? I thought waiting for 7 years (up to 2026) was required for the 15% basis step up to apply.

I thought money shouldn’t be touched for 10 years for maximum tax benefit: 7 years for the 15% basis step up and 10 years for tax free earnings. If money is pulled out just after 2 years then perhaps either the 15% basis step up is lost (if distributions are treated as return of capital) or the tax free earnings is lost (if distributions are treated as earnings). What’s the point of complying with the OZ rules if the tax benefits are lost due to pulling money out after 2 years?

Seems like mileage method may not be possible for anyone who rented their car on platforms like Turo, because the gas is paid for by the renter. Assuming that a few cents out of 58 may be allocated to gas, the mileage method may mean deducting gas expenses which were not incurred.

@Ben Durwood not sure if the syndicators have audited financials. As for ponzi scheme, that’s a valid concern. I have seen syndications where the distributions during the hold period would come from a cash reserve created using LP money itself (instead of from operations). To me it is like a ponzi scheme but if the syndicator has the audacity to put that in the business plan then I’m guessing that it is legal in real estate. Why would anyone invest in such a deal? But people do - perhaps they are oblivious of the details. There may be more sophisticated Ponzi schemes going on than what I have pointed out.

I haven’t read any books yet (perhaps I should), but my strategy is to make sure the syndicator has sufficient skin in the game. They use various tricks on that front - mention their equity contribution but don’t mention the fees they are collecting at closing, mention their contribution as an absolute amount (or % of equity) rather than % of total capital stack, etc. The syndicator’s projected coc is better than LP’s (which is ok as the syndicator is doing all the work), but if the deal goes south then their loss should also be much greater (like 10x) than any LP. Otherwise why would any syndicator bother to work hard to turn a deal around when the deal goes south.

Perhaps ask a question like this when you receive a deal: what is your contribution to the deal (% of total capital stack) net of all the fees collected, what would be the coc return and equity multiple for you and any LP if the proforma is met, describe a scenario in which the deal goes south - what would be the capital loss for you and any LP in that scenario.

The quality of answers could be enough for you to follow up or not. The syndicator may also decide to go for easier/dumber money than seek from you. There are many other criteria, but skin in the game is the primary one for me.

I looked into buying some rentals so that I could use the depreciation loss from rentals to offset the gains from passive syndications. But realized it’s not worth the hassle. Uncle Sam is not a dummy - he is always 2-steps ahead. He is not going to let anyone take “his money” just like that. Even giving up US citizenship comes with a big settlement.

Depreciation recapture is taxed at a higher rate than long-term capital gains, and earning very little to avoid paying taxes (by being in a lower tax bracket) is a regressive strategy. It’s always easy to not pay any taxes by earning very little.

Uncle Sam probably wants everyone to do 1031x so that someone else can take the risk of making investments to grow the economy. Uncle Sam will make money even if the investment goes south. And he has created conditions which will mean paying more taxes (than saved via depreciation) if someone wants to actually realize the gains instead of doing 1031X. It’s quite contradictory for those who want to take the tax benefits “now” but are left with the only choice of leaving it for their heirs (which is better than saying they don’t want to pay more taxes than what they saved). There are much better ways to leave money for heirs than via real estate properties. I’m sure professional CPAs on biggerpockets will disagree, as everyone’s situation is unique.

Kitchen is used everyday, more than once. Why would any tenant want to continue to deal with a ‘finicky’ stove? What they are being subjected to is not good for their mental health, and that’s why they made their demand. Don’t be a slumlord.

@Jai Reddy So depreciation recapture should not be mentioned because 1031X is guaranteed?

To everyone illuminating the OP about depreciation - why talk about depreciation without mentioning depreciation recapture?

Even opportunity zone investment will only defer the taxes, while the investor takes the risk of losing the gains that are invested.

It may be a reasonable option, but don’t portray as if someone can hit home run with taxes by making real estate investments.

I think it is very unlikely that you can reduce the taxes. If it was that easy, everyone would be doing it. The tax reduction planning has to be done *before* realizing the gains, not after. Even then, Uncle Sam seems to win every time. Not sure if buying real estate is going to cut it. Maybe donate all the earnings to a charity, but then you would not be paying taxes because you have no earnings.

Only sure way to not pay any taxes is to give up US citizenship, but that is perhaps beneficial only for older retired people.

@Randall Re II not sure if it is illegal in your state, but it is definitely unethical. You should renegotiate.

Many buyers wait for the seller to do something illegal/unethical (generally their broker/agent is the liar), so that they can either get the deal for steep discount or make the property unsellable - this generally requires a lawyer who knows what they are doing.