Help understanding a LP K-1 net loss

Help understanding a LP K-1 net loss

Morgantown, WV · Member since 2017 · 22 posts · 19 votes

I invested in 7 syndication funds in 2023 as a limited partner with the expectation that I would generate first year losses from cost segregation that I could use to offset my gains on my personal real estate investments (self storage).  The K-1s I received all show a Net rental real estate income loss on Part III line 2 as expected.  The software my accountant is using is writing off these losses against my W-2 income which is telling me I am entitled to a refund.  We went on to talk about deferring some of these losses for a net impact of 0$ so I could apply these to gains in 2024.  From everything I've read something doesn't seem right here.  I underpaid on W-2 slightly, had long term capital gains on stock sales, and a small income gain on my personal K-1.  I was only expecting the limited partner K-1 losses to offset the personal K-1 gain.  Any experience others have had is welcomed.  I live in WV and own my self storage rentals in WV.

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Jason WatsonBusiness Member
CPA · Colorado Springs, CO · Member since 2024 · 98 posts · 83 votes
2y

Sorry to be this guy... but what a client hopes or expects is a product of poor or non-existent tax planning. Far too many taxpayers draw up their tax return in their head without a real plan. Or they talk to their bartender or produce clerk, and not their tax pro. Not saying this is the case... but with proper tax planning there should be zero surprises. Like none.

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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    2y

    I'm not a CPA but this is my understanding

    For Federal return, the state of the property or the state where you live does not matter.

    You can write off up to $25,000 of passive losses against your active income if your AGI is below $100K.  The amount you can write off phases out if your AGI is above $100K and goes to zero once you hit $150K.

    If you qualify as a Real Estate Professional Status (REPS) then any passive loss can offset any active income.  You did not stat this, but are you REPS?

  • Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y

    "writing off these losses against my W-2 income which is telling me I am entitled to a refund" Are you properly qualifying as real estate professional? Please ensure you are. If you are not, you are improperly taking that write off. These passive sydications should generate passive losses for most people, those exceptions being folks who qualify for REPS AND are properly participating in and electing the rental activity 

  • Morgantown, WV · Member since 2017 · 22 posts · 19 votes
    2y
    Quote from @Account Closed:

    "writing off these losses against my W-2 income which is telling me I am entitled to a refund" Are you properly qualifying as real estate professional? Please ensure you are. If you are not, you are improperly taking that write off. These passive sydications should generate passive losses for most people, those exceptions being folks who qualify for REPS AND are properly participating in and electing the rental activity 


    I do not qualify as a real estate professional.  I have emailed my accountant to see if his software has me tagged as such and that is why the huge discrepancy between what I thought I would owe vs what he came up with.

  • Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @Ryan Tyree:
    Quote from @Account Closed:

    "writing off these losses against my W-2 income which is telling me I am entitled to a refund" Are you properly qualifying as real estate professional? Please ensure you are. If you are not, you are improperly taking that write off. These passive sydications should generate passive losses for most people, those exceptions being folks who qualify for REPS AND are properly participating in and electing the rental activity 


    I do not qualify as a real estate professional.  I have emailed my accountant to see if his software has me tagged as such and that is why the huge discrepancy between what I thought I would owe vs what he came up with.


     gotcha. Please ensure you get this fixed, it can become an issue if you were to get audited! 

  • Accountant · Austin, TX · Member since 2016 · 72 posts · 72 votes
    2y

    A note about the $25,000 loss allowance, that only applies to real estate tax losses for an activity that you "actively participate" in.  So that generally doesn't apply to a partnership where you're a limited partner and you're just passively investing in the deal.

    So then the only way you can have real estate losses on a K-1 as a limited partner that you can deduct from your W-2 income is if you qualify for real estate professional status (REPS), as some of the other comments mentioned.  And you would only qualify for that if your primary job (where you spend the most hours) is in a real estate field, but also it has to be at a business that you own at least 5% of (so W-2 income typically doesn't qualify).  So if your main job is a W-2 job, you probably don't qualify.

    But that's still not all because in addition to REPS status, you also have to qualify as having material participation in the K-1 business to make it non-passive income.  But if you make a 1.469-9(g) grouping election, you can group your rental activities (self-storage qualifies) and your real estate partnerships together and then you just have to have enough hours to materially participate in the group, so then your K-1 income can qualify.

    It's not uncommon for tax professionals to not know about how to use REPS and the grouping election to make limited partnership K-1 income non-passive.  But they should generally at least know that limited partnership K-1 tax losses can't just offset your W-2 income in most cases, it would be concerning if they don't at least know that. 

    David Orr
    Tax Modern

  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    2y

    @Ryan Tyree

    We do not have the full story, but it is possible that your CPA mistakenly marked your K1 as "material participation."

    Here are a general post on K1s:
    https://www.biggerpockets.com/forums/51-tax-legal-issues-con...

  • Jason WatsonBusiness Member
    CPA · Colorado Springs, CO · Member since 2024 · 98 posts · 83 votes
    2y

    Sorry to be this guy... but what a client hopes or expects is a product of poor or non-existent tax planning. Far too many taxpayers draw up their tax return in their head without a real plan. Or they talk to their bartender or produce clerk, and not their tax pro. Not saying this is the case... but with proper tax planning there should be zero surprises. Like none.

  • Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @Jason Watson:

    Sorry to be this guy... but what a client hopes or expects is a product of poor or non-existent tax planning. Far too many taxpayers draw up their tax return in their head without a real plan. Or they talk to their bartender or produce clerk, and not their tax pro. Not saying this is the case... but with proper tax planning there should be zero surprises. Like none.


     Indeed. As accountants we need to keep clients realistic about tax goals and shoot town the "I saw on tiktok" or "produce clerk said this strategy" to keep them on track and their networth growing in a smooth and tax efficient way 

  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    2y

    by default, the K-1's will be treated as passive unless you can show that they are not passive.

    If they are passive, they would not be eligible to offset your W-2 Income.

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