Taxes on multi-family syndication

[Charit P.]

Hoping someone with syndication and tax knowledge can answer my question. My first LP multi-family syndication deal sold for a profit in 2022. When I sum up the tax losses claimed during the first 2 years of the deal and the gains reported on my 2022 taxes (all from form 8582), the total is much larger than the actual cashflow + sale profits. My expectations were that the depreciation and other tax losses and gains should offset each other and at the end of the day the gains reported for taxes should equate the tangible gains that I received. This is not the case. Since this is my first syndication sale, I have no other frame of reference.

I have a theory though …….. My CPA says that the profits and losses reported on the K1 are based on ownership share. When I look at the syndication’s PPM it seems the LPs own 100% of the venture with GPs owning none (some of my other syndications assign 70% ownership to LPs and 30% to GPs, matching the profit-sharing ratio). Is it possible that since GPs don’t have an ownership share, their 30% of the profit share is being reported as passed-through gains to the LPs? This would explain why my share of “theoretical” gains is larger than the actual cash received. Anyone else been in the same situation or know if it is possible that a syndication can be structured in such a way that the LPs bear all the tax burden?

[Brian Burke]

What you are seeing is likely depreciation recapture.  Look at the starting capital account balance on the K-1.  If you invested $100K and the starting capital account balance is $25K, that means your depreciation losses likely exceeded income by $75K (there are nuances to this but this is the general idea). 

So if you got $200K back at the sale, $100K is profit, $75K is recapture (taxable), and $25K is return of principal (non-taxable).  There is also $75K or capital return but it’s in the recapture so it’s taxable.

I doubt that the LPs are getting taxed for the GP’s share.  If that’s even legal it would be highly unusual.