I am looking into my first syndication deal and if I was curious what tax benefits apply to someone who's about 3-4% on a 1.8mm deal that includes an 18 unit apartment and 6 air bnb's?
I would love to be able to offset some of my W2 taxes.
Real Estate Consultant · Denver, CO · Member since 2021 · 661 posts · 389 votes
4y
@Brandon Craig Unfortunately, unless you are qualified as a Real Estate Professional you cannot use passive losses against your W2 income. And, it is very rare that the IRS will allow you RE Pro status if you have a W2 income. You can only use those passive losses that are generated with cost segregation against the income on that particular property. If you own other passive income you should discuss with your CPA/tax professional about aggregating all passive income properties so that you can offset the income on one with the losses on another. There is one other option that could help and that is if your spouse can qualify as a RE Professional. I hope that helps. If you need more information, let me know.
Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
4y
You need to ask the sponsor & read the documents to see what they're doing with depreciation and how it is being allocated to investors. Either way, W-2 income is unfortunately hard to get write offs against through passive investments.
Real Estate Consultant · Denver, CO · Member since 2021 · 661 posts · 389 votes
4y
@Brandon Craig Unfortunately, unless you are qualified as a Real Estate Professional you cannot use passive losses against your W2 income. And, it is very rare that the IRS will allow you RE Pro status if you have a W2 income. You can only use those passive losses that are generated with cost segregation against the income on that particular property. If you own other passive income you should discuss with your CPA/tax professional about aggregating all passive income properties so that you can offset the income on one with the losses on another. There is one other option that could help and that is if your spouse can qualify as a RE Professional. I hope that helps. If you need more information, let me know.
@Brandon Craig Unfortunately, unless you are qualified as a Real Estate Professional you cannot use passive losses against your W2 income. And, it is very rare that the IRS will allow you RE Pro status if you have a W2 income. You can only use those passive losses that are generated with cost segregation against the income on that particular property. If you own other passive income you should discuss with your CPA/tax professional about aggregating all passive income properties so that you can offset the income on one with the losses on another. There is one other option that could help and that is if your spouse can qualify as a RE Professional. I hope that helps. If you need more information, let me know.
Thank you. So I can use it against the cash flow at least from the properties
Multifamily Syndicator · Houston, TX · Member since 2018 · 188 posts · 192 votes
4y
What @Bonnie Griffin Kaake said is spot on. If you're a W2 employee, it's going to have very little impact on your tax situation. If you are married and your partner is a real estate professional, things can change. Consult your tax professional as this is my opinion and not tax advice.
Specialist · Scottsdale, AZ · Member since 2014 · 626 posts · 700 votes
4y
Even if you are a W2 employee, if you have other income that qualifies, such as income from the sale of real estate, from a passive investment in a syndication, or other qualified passive investments, you may still benefit from an investment that includes bonus deprecation. With that said, it is more common for investors to seek bonus deprecation when they have a large amount of qualified income and are seeking passive losses to offset.
For example, some of our investors are specifically seeking to resolve an unsuccessful 1031 exchange, where they had an upleg identified but it did not close escrow and now they are facing a tax event. Investing in a syndication where cost segregation/ bonus depreciation is being utilized is a solution that is many times referred to as the "lazy man's 1031" and allows the deferral of those gains.
Keep in mind, the bonus depreciation benefit is going to start phasing out starting in 2023, so what is accurate today will be reduced year-over-year until it is completely phased out in 2027. Also, the depreciation carries forward, so if you don't have a use for it this year you will continue to have access to the benefit in subsequent years.
All the best,
Jack
Note: I am not a tax advisor or CPA. This perspective is solely from my own experience managing mobile home park funds and working with the tax experts around us. Here on BP, I would acknowledge @Yonah Weiss and @Julio Gonzalez as experts in cost segregation and bonus depreciation.
Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes
4y
There are a ton of factors to consider. The additional depreciation will help offset other passive income. If you are real estate professional status, the benefits are even greater
I am looking into my first syndication deal and if I was curious what tax benefits apply to someone who's about 3-4% on a 1.8mm deal that includes an 18 unit apartment and 6 air bnb's?
I would love to be able to offset some of my W2 taxes.
Thank you,
Brandon
As others have stated passive losses only offset passive gains, unless you are a real estate professional.
The % of losses generated are dependent on the kind of property, class of property, leverage, and the company that is doing the cost segregation.
@Brandon Craig As many others have mentioned, with a syndication passive losses only offset passive income. If you were to own a property and actively participated in the property, you could utilize the passive loss limitation allowance to partially offset W-2 income. If you have any further questions on cost segregation and bonus depreciation, please feel free to reach out!
Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
4y
Hi @Brandon Craig! The advice you got above is spot on. Bonus depreciation should allow you to create paper losses that can be carried forward to offset years of your passive income, most likely. For a deal like that, depending on the debt, and 100 other factors, you might see between 15%-30% losses in year 1. Good luck and happy investing!