Realizing tax benefits while investing in a syndication deal

[Jason Padgett]

Curious to understand some of the tax-related nuances with regard to taking a more passive approach through a syndication investment. Specifically, how this type of investment is typically treated for tax purposes (i.e. can you still realize benefits such as depreciation, cost segregation, etc.) and what gotcha's exist to look out for (creating an entity to invest etc.)?

[Yonah Weiss]

@Jason Padgett As @Greg Dickerson said there are several ways that syndicators will structure the operating agreement, and that will dictate how much if any of the depreciation is passed through to the investors.

The most common scenario I've seen, is where the investors receive an equity stake in the property, as an LP, according to the percentage of their investment in the deal. In this case they would receive depreciation (and accelerated depreciation or 100% bonus depreciation with cost segregation) according to their percentage of ownership.

Let's say they invested $100,000 which acquired 5% of the equity. The depreciation could be $500,000 in the first year (or first 5 years), they would receive $25,000 (5% of $500K) of depreciation write off. If they received a 10% return, (which is great!) they would have $10K income, and $25K write-off = -$15K (negative passive loss). Now how much of that passive loss, if any, can be used to offset other income will depend on A) if they are a 'real estate professional' B) if their not a REP if they have an AGI, adjusted gross income of less than $150,000 (which is pretty unlikely in our scenario if they invested $100K)

That passive loss will be carried forward into future tax years, if it is not utilized in the current year.