Multi-Family Syndication & Tax Depreciation

[Scott Blackwill]

Can someone explain to me how tax depreciation works as an LP? At what point do I actually pay taxes on my capital gains? Is it really just deferment and at some point I'll have to pay on all of it?  Seems like a too good to be true scenario. Doesn't the gov eventually recapture that year 1 depreciation because the sale of these properties is done fairly early (5 - 7 years)?  Layman's terms please!  I'm trying to explain to others why it's a great thing but I don't quite understand it yet myself.  Thanks!

[Nick B.]

Depreciation is passed to the LP according to their %% of the ownership. E.g. if you own 1% of equity you get 1% of the depreciation of a given year. It reduces taxable income from the property and if that income becomes negative, it is subtracted from other passive income (other property that may have positive income) or ordinary income (if you make less than $100K or you are a real estate professional) or is carried over to the next year.

Once the property is sold, all previous depreciation becomes a subject to recapture - it is added to the income and taxed at a special rate (20% or so - ask your CPA). Capital gains are taxed after the sale at the long term capital gain rate. However, if you have excess depreciation from other properties that excess depreciation is applied to the capital gains making them tax deferred.

Ultimately, your taxes (long term capital gains + recapture depreciation) are due in full when all your properties are sold.

However, if you keep reinvesting you can effectively defer taxes forever similar to 1031.

DISCLAIMER: I am not a CPA and this in not a tax advice. I am an LP investor though and I've been through a full deal cycle.