Syndication Tax Benefits

[Dylan Brown]

I've recently began exploring the idea of apartment syndication investing as I currently work 80-100 hours a week at my full-time job. I am wondering how the tax benefits work for syndication investors and if they are comparable to purchasing real estate on my own. 

[Steve S.]

@Dylan Brown I am not a CPA but have invested in a number of real estate and business syndications as a passive investor. Each year you will receive a K-1 showing if you had passive losses or gains. On line item 2 in Part III of the K-1, it will show the "Net rental real estate income (loss)" for that year. If it is a non-real estate syndication, that number will be in line item 1 of Part III - "Ordinary business income (loss)". Upon sale of the asset, the final K-1 will show the gain (or hopefully not a loss) on line items 9 and/or 10 in Part III. The Tax Smart Real Estate Podcast has a series of episodes teaching about these types of passive losses.

The tax shelter from these passive losses can be substantial - sometimes 100% of your investment in year one because of bonus depreciation. As mentioned by others, passive losses will only offset passive gains (unless you are a REP), not W-2 income, 1099 income, or capital gains.  This year is the last year to obtain 100% bonus depreciation. Next year it starts to go down by 20% each year. Any losses not used in a given year are carried over indefinitely until they are used up. You can keep track of these suspended passive losses on form 8582 in your 1040.

Even if you do a cost segregation study on your direct rentals, you probably won't come close to the amount of bonus depreciation you can get from passive syndication investing in multifamily or business equipment funds like ATMs. In my experience, self-storage, office, development, and retail syndications may not give you a comparable amount of bonus depreciation in year 1 compared with multifamily. Ask the sponsor how much bonus depreciation to expect in year 1. But whatever avenue you decide to go down, do not let the tax tail wag the dog. Make sure you are investing in a solid, cashflowing asset.