Tax question for LP passive investments and personal capital gain

Rental Property Investor · Phoenix, AZ · Member since 2018 · 31 posts · 30 votes

Hi guys,

I have a tax related question if any of you guys have personal experience or knowledge.

This year I have invested in several syndication's as an LP (passive investor) at the same time in which I have sold a rental investment. Since all the syndication's are relatively new, I'm assuming I will be taking losses on those investments (as some of the syndication's do not bring in returns for several years). Can or will those losses be able to be used against my large capital gains income from the sale of my recent rental property? Both of the LP investments and rental property sale are from my LLC.

Thanks everyone

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Ivan Barratt

Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes

I have had several clients offset the gains but the rentals were passive as well. key question: is your rental a passive investment or do you actively manage it? you'll need to pull in a cpa on this. if your cpa says no I'd ask another just be sure.

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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 4k+ votes
7y
@Michael Wang

Investments in real estate syndication as an LP normally result in passive losses from a tax perspective.
Sale of a rental investment is a 1231 gain/(loss).

You can't offset 1231 gain with passive losses.
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Michael Le
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
7y
Originally posted by @Basit Siddiqi:
@Michael Wang

Investments in real estate syndication as an LP normally result in passive losses from a tax perspective.
Sale of a rental investment is a 1231 gain/(loss).

You can't offset 1231 gain with passive losses.

Would that be different if he was a full-time qualified real estate professional?

1 Reply
Chris Coleman
Rental Property Investor · Washington, DC · Member since 2015 · 429 posts · 393 votes
7y
@Michael Wang even the syndications that do provide income in the first year can still show a loss on your K-1, due to depreciation.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 4k+ votes
7y
Originally posted by @Michael Le:
Originally posted by @Basit Siddiqi:
@Michael Wang

Investments in real estate syndication as an LP normally result in passive losses from a tax perspective.
Sale of a rental investment is a 1231 gain/(loss).

You can't offset 1231 gain with passive losses.

Would that be different if he was a full-time qualified real estate professional?

Assuming he is a below 5% owner and does not participate in any function of the real estate within the partnership. The answer would be the same.

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Michael Wang
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Rental Property Investor · Phoenix, AZ · Member since 2018 · 31 posts · 30 votes
7y
Originally posted by @Basit Siddiqi:
@Michael Wang

Investments in real estate syndication as an LP normally result in passive losses from a tax perspective.
Sale of a rental investment is a 1231 gain/(loss).

You can't offset 1231 gain with passive losses.

Hi Basit,

Understood thank you very much this clarifies it.
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Ivan Barratt
Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
7y
I have had several clients offset the gains but the rentals were passive as well. key question: is your rental a passive investment or do you actively manage it? you'll need to pull in a cpa on this. if your cpa says no I'd ask another just be sure.
4 Reply
Dan HandfordPro Member
Investor · Lexington, SC · Member since 2018 · 779 posts · 501 votes
7y
@Michael Wang I agree with @Ivan Barratt on this one. I would check with your CPA as long as they know about these types of syndications and depreciation benefits. Many of our passive investors have found that their CPA does not have a ton of knowledge around these types of investments. This is why it is worth the few extra bucks to get a second opinion or possibly consider changing your CPA. @Brandon Hall might have something to add here.
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Dominick AustriaBusiness Member
Accountant · Las Vegas · Member since 2019 · 51 posts · 21 votes
7y
Assuming your rentals were a passive activity to you, the gain would be consider passive income in which your passive losses can be taken against it. Capital gains aren’t actually passive income it’s portfolio. But because this gain came from your passive activity its passive for PAL. In other words the gain from the sale of the rental would free up all of your PAL. You should be able to take passive losses against it. I’d have your CPA run through your facts to be sure though.
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Scott Morongell
Investor · Charlotte, NC · Member since 2017 · 791 posts · 479 votes
7y
@Michael Wang I am not a CPA but here is my opinion based off what my RE focused CPA would say. "It Depends". Do you file taxes as a real estate professional? If yes, you are able to offset not only passive income but ordinary income as well. If the syndicators are not doing cost seg studies and taking bonus depreciation your paper losses will not be as glamorous as you might think. Check to make sure they are doing cost seg!
*As far as the syndications that you invested in, can you speak more about the ones that are not bringing returns in for several years? What type of assets are these? Why aren't they generating cashflow day 1? What types of returns are being projected? What ultimately made you invest in them? I am a syndicator and only look for deals that cashflow from day1. I am selfishly asking the questions above to see if it can spark a layer of creativity for my company. Thanks Michael
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Michael Wang
OP
Rental Property Investor · Phoenix, AZ · Member since 2018 · 31 posts · 30 votes
7y
Originally posted by @Ivan Barratt:
I have had several clients offset the gains but the rentals were passive as well. key question: is your rental a passive investment or do you actively manage it? you'll need to pull in a cpa on this. if your cpa says no I'd ask another just be sure.

Hi Ivan and Dominick,

Would having a tenant manager classify the property as being passive? As for paying yearly taxes and insurances, I did manage those aspects.

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Michael Wang
OP
Rental Property Investor · Phoenix, AZ · Member since 2018 · 31 posts · 30 votes
7y
Originally posted by @Scott Morongell:
@Michael Wang I am not a CPA but here is my opinion based off what my RE focused CPA would say. "It Depends". Do you file taxes as a real estate professional? If yes, you are able to offset not only passive income but ordinary income as well. If the syndicators are not doing cost seg studies and taking bonus depreciation your paper losses will not be as glamorous as you might think. Check to make sure they are doing cost seg!
*As far as the syndications that you invested in, can you speak more about the ones that are not bringing returns in for several years? What type of assets are these? Why aren't they generating cashflow day 1? What types of returns are being projected? What ultimately made you invest in them? I am a syndicator and only look for deals that cashflow from day1. I am selfishly asking the questions above to see if it can spark a layer of creativity for my company. Thanks Michael

Hi Scott,

No I am not considered a real estate professional and thank you I will ask them if they are doing cost segs!

As for the syndication's, the assets are all multi families that are needing significant rehab the first 2-3 years. As for why I invested into them ultimately came down to the trust I have in the operators to fulfill their business plans.
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Scott Morongell
Investor · Charlotte, NC · Member since 2017 · 791 posts · 479 votes
7y
Originally posted by @Michael Wang:
Originally posted by @Scott Morongell:
@Michael Wang I am not a CPA but here is my opinion based off what my RE focused CPA would say. "It Depends". Do you file taxes as a real estate professional? If yes, you are able to offset not only passive income but ordinary income as well. If the syndicators are not doing cost seg studies and taking bonus depreciation your paper losses will not be as glamorous as you might think. Check to make sure they are doing cost seg!
*As far as the syndications that you invested in, can you speak more about the ones that are not bringing returns in for several years? What type of assets are these? Why aren't they generating cashflow day 1? What types of returns are being projected? What ultimately made you invest in them? I am a syndicator and only look for deals that cashflow from day1. I am selfishly asking the questions above to see if it can spark a layer of creativity for my company. Thanks Michael

Hi Scott,

No I am not considered a real estate professional and thank you I will ask them if they are doing cost segs!

As for the syndication's, the assets are all multi families that are needing significant rehab the first 2-3 years. As for why I invested into them ultimately came down to the trust I have in the operators to fulfill the business plan.

It may be tough to get the passive paper loss to offset capital gains / ordinary income if your not a RE professional. A good RE focused CPA will be able to direct you!

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Ivan Barratt
Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
7y
@Michael Wang that would be a question for your CPA. Quick experience share. I have an investor that sold two duplexes in 2018 and reinvested proceeds into a larger syndication. His "CPA" told him he owed ~60k in additional gains. We got him looped in with our big, sexy (and expensive!) regional accounting firm. His tax bill was reduced back down to zero (with respect to the property sales).
Lesson: don't take No for an answer and the higher you climb in this game the better your advisor team will need to be...

Further discussion preferred? Let's chat offline.

All the best man!
2 Reply
Dominick AustriaBusiness Member
Accountant · Las Vegas · Member since 2019 · 51 posts · 21 votes
7y
Originally posted by @Michael Wang:
Originally posted by @Ivan Barratt:
I have had several clients offset the gains but the rentals were passive as well. key question: is your rental a passive investment or do you actively manage it? you'll need to pull in a cpa on this. if your cpa says no I'd ask another just be sure.

Hi Ivan and Dominick,

Would having a tenant manager classify the property as being passive? As for paying yearly taxes and insurances, I did manage those aspects.

Rentals are classified as passive unless you can prove you are active. Very hard to do unless you are a RE Pro.

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Frank Maratta
Rental Property Investor · CT · Member since 2019 · 105 posts · 68 votes
7y
@Dominick Austria
PAL = pass activity loss ?
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Travis Watts
Investor · FL · Member since 2017 · 247 posts · 245 votes
7y
@Michael Wang Good question. It appears this has been answered; however, I too am an LP investor in numerous syndications. I'm happy to share my K1 examples with you to help visually explain.
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Michael Wang
OP
Rental Property Investor · Phoenix, AZ · Member since 2018 · 31 posts · 30 votes
7y
Originally posted by @Travis Watts:
@Michael Wang Good question. It appears this has been answered; however, I too am an LP investor in numerous syndications. I'm happy to share my K1 examples with you to help visually explain.

Great thanks Travis I sent a PM to you. Would be great to collaborate!

1 Reply
Chris Grenzig
Property Manager · Orlando, FL · Member since 2016 · 479 posts · 277 votes
7y
@Michael Wang I believe if you have a W-2 in a non real estate company or not at least a 5% owner (like @Basit Siddiqi mentioned) than you need to be able to show a certain amount of hours to be denoted as a real estate professional in which case your passive losses would offset...I believe...maybe
0 Reply
Michael Wang
OP
Rental Property Investor · Phoenix, AZ · Member since 2018 · 31 posts · 30 votes
7y
Originally posted by @Chris Grenzig:
@Michael Wang I believe if you have a W-2 in a non real estate company or not at least a 5% owner (like @Basit Siddiqi mentioned) than you need to be able to show a certain amount of hours to be denoted as a real estate professional in which case your passive losses would offset...I believe...maybe

Hi Chris,

Will have to look into this. Thanks for the input!

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