Multifamily Syndication After-Tax Returns for a LP
Investor · Alpharetta, GA · Member since 2019 · 78 posts · 74 votes
Does anyone have an actual (net after-tax) return breakdown from a multifamily syndication that they have participated in as a Limited Partner?
I'm particularly interested in Limited Partners who would not benefit from QREP status, nor a 1031 exchange.
I know you'd be subject to capital gains tax and depreciation recapture and I'd like to see if someone has an actual example or possibly a link to an actual example.
E.g. projected CoC returns were 8% and realized IRR was 18%, what is the actual after-tax return per annum after holding for 5 years and paying all capital gains and depreciation recapture taxes (or whatever the deal was).
Maybe the equity multiple was listed at 2.1X, but what was your actual after-tax multiple? Just want to see what the actual tax hurdles are for those of us not investing inside of a SD-IRA and not capable of taking advantage of 1031 exchanges or QREP status.
Thanks!
Yours is a good question but there is really no way to answer the question. Other than to say, it depends. Each person has a different financial and tax situation.
Active real estate professionals for example are treated much differently than W2 people. So if you are an active real estate professional like I am, the tax treatment of gains, losses, and income is different than for others.
High level, here is how I would look at it. Everyone pays taxes on every dollar they ever make. That being said, real estate offers certain tax advantages not available to other investments. So high level and in general, the taxes paid on real estate income and gains is almost never more than what you pay on other forms of income.
I believe in considering investments, looking at before tax returns is the first step. That will be comparing apples to apples. Then you can dive down with your CPA and calculate your PERSONAL AFTER TAX RETURNS of various investments. There is NO one size fits all here. It is individual and specific to each person. Seeing someone else’s after tax analysis will be of little benefit to you or I. I suspect after said analysis, you find 9 times out of 10, you will find, your AFTER TAX return is better with real estate than almost any other investment.
Here is a short list of many of the personal factors that would need to be considered before an after tax return could be calculated:
Does one qualify as an active real estate professional?
Is your spouse a real estate professional?
What is one’s W2 income? What federal and state tax bracket is one in?
Certain tax deductions phase out after a certain income level is reached.
Does one have additional passive income or loss?
Does one have passive loss carry forwards from previous years?
Truth is No One, other than an investor’s own CPA or tax professional should be calculating an investor’s After Tax return. It is just too complicated.
I know this doesn’t answer your question but hopefully provides a little insight.
This is why an investor always see a disclaimer. “Discuss with your CPA or tax professional”.
Yours is a good question but there is really no way to answer the question. Other than to say, it depends. Each person has a different financial and tax situation.
Active real estate professionals for example are treated much differently than W2 people. So if you are an active real estate professional like I am, the tax treatment of gains, losses, and income is different than for others.
High level, here is how I would look at it. Everyone pays taxes on every dollar they ever make. That being said, real estate offers certain tax advantages not available to other investments. So high level and in general, the taxes paid on real estate income and gains is almost never more than what you pay on other forms of income.
I believe in considering investments, looking at before tax returns is the first step. That will be comparing apples to apples. Then you can dive down with your CPA and calculate your PERSONAL AFTER TAX RETURNS of various investments. There is NO one size fits all here. It is individual and specific to each person. Seeing someone else’s after tax analysis will be of little benefit to you or I. I suspect after said analysis, you find 9 times out of 10, you will find, your AFTER TAX return is better with real estate than almost any other investment.
Here is a short list of many of the personal factors that would need to be considered before an after tax return could be calculated:
Does one qualify as an active real estate professional?
Is your spouse a real estate professional?
What is one’s W2 income? What federal and state tax bracket is one in?
Certain tax deductions phase out after a certain income level is reached.
Does one have additional passive income or loss?
Does one have passive loss carry forwards from previous years?
Truth is No One, other than an investor’s own CPA or tax professional should be calculating an investor’s After Tax return. It is just too complicated.
I know this doesn’t answer your question but hopefully provides a little insight.
This is why an investor always see a disclaimer. “Discuss with your CPA or tax professional”.
Yours is a good question but there is really no way to answer the question. Other than to say, it depends. Each person has a different financial and tax situation.
Active real estate professionals for example are treated much differently than W2 people. So if you are an active real estate professional like I am, the tax treatment of gains, losses, and income is different than for others.
High level, here is how I would look at it. Everyone pays taxes on every dollar they ever make. That being said, real estate offers certain tax advantages not available to other investments. So high level and in general, the taxes paid on real estate income and gains is almost never more than what you pay on other forms of income.
I believe in considering investments, looking at before tax returns is the first step. That will be comparing apples to apples. Then you can dive down with your CPA and calculate your PERSONAL AFTER TAX RETURNS of various investments. There is NO one size fits all here. It is individual and specific to each person. Seeing someone else’s after tax analysis will be of little benefit to you or I. I suspect after said analysis, you find 9 times out of 10, you will find, your AFTER TAX return is better with real estate than almost any other investment.
Here is a short list of many of the personal factors that would need to be considered before an after tax return could be calculated:
Does one qualify as an active real estate professional?
Is your spouse a real estate professional?
What is one’s W2 income? What federal and state tax bracket is one in?
Certain tax deductions phase out after a certain income level is reached.
Does one have additional passive income or loss?
Does one have passive loss carry forwards from previous years?
Truth is No One, other than an investor’s own CPA or tax professional should be calculating an investor’s After Tax return. It is just too complicated.
I know this doesn’t answer your question but hopefully provides a little insight.
This is why an investor always see a disclaimer. “Discuss with your CPA or tax professional”.
Hey Arn! Thanks for the input. I am totally fine with understanding that everyone's tax treatment will be different, but I'd still like to hear of some actual results even considering that there are obviously several assumptions built into their results.
I'm mostly curious in comparing apples-to-apples with equities versus syndications. I see a lot of comparisons of the pre-tax returns, but everything gets fuzzy and few mention the after-tax returns of equities versus syndications.
With equities, as long as they are held long enough to be considered long-term capital gains, you are fairly confident in what amount you'll be paying upon liquidation. Obviously one big benefit of syndications is that cashflow (similar to an equity dividend) will not be taxed until depreciation recapture, while qualified dividends from an equity can be taxed at the 0,15, or 20% rate.
From what I understand, with syndications and depreciation recapture, assuming that you have no other tax benefits, you can end up paying a higher amount than the LT capital gains rate on your recaptured depreciation.
Does anyone have an actual (net after-tax) return breakdown from a multifamily syndication that they have participated in as a Limited Partner?
I'm particularly interested in Limited Partners who would not benefit from QREP status, nor a 1031 exchange.
I know you'd be subject to capital gains tax and depreciation recapture and I'd like to see if someone has an actual example or possibly a link to an actual example.
E.g. projected CoC returns were 8% and realized IRR was 18%, what is the actual after-tax return per annum after holding for 5 years and paying all capital gains and depreciation recapture taxes (or whatever the deal was).
Maybe the equity multiple was listed at 2.1X, but what was your actual after-tax multiple? Just want to see what the actual tax hurdles are for those of us not investing inside of a SD-IRA and not capable of taking advantage of 1031 exchanges or QREP status.
Thanks!
This would be a question for your accountant. You receive a K-1 as an LP investor so how that impacts your tax situation is relative to your personal situation and tax structure.
Does anyone have an actual (net after-tax) return breakdown from a multifamily syndication that they have participated in as a Limited Partner?
I'm particularly interested in Limited Partners who would not benefit from QREP status, nor a 1031 exchange.
I know you'd be subject to capital gains tax and depreciation recapture and I'd like to see if someone has an actual example or possibly a link to an actual example.
E.g. projected CoC returns were 8% and realized IRR was 18%, what is the actual after-tax return per annum after holding for 5 years and paying all capital gains and depreciation recapture taxes (or whatever the deal was).
Maybe the equity multiple was listed at 2.1X, but what was your actual after-tax multiple? Just want to see what the actual tax hurdles are for those of us not investing inside of a SD-IRA and not capable of taking advantage of 1031 exchanges or QREP status.
Thanks!
This would be a question for your accountant. You receive a K-1 as an LP investor so how that impacts your tax situation is relative to your personal situation and tax structure.
I've spoken with my accountant--I know I'm definitely not optimized to take advantage of all the tax benefits, but I don't have a desire to be fully active and qualify as a QREP. Just curious if others have run into anything that snuck up on them and/or possibly reduced their after-tax returns significantly.
I'm still evaluating returns on a pre-tax basis, and the advantage of leverage is obvious.
LP syndication investments will include long term capital gains and ordinary income and each of these will be taxed at different rates. This is similar as you note to equities and dividends.
I think for me, the question Syndication v Equity investments is not so much about tax treatment but rather risk and reward, stability v volatility, etc.
I think picking the best investment that fits one’s needs and risk tolerance levels is primary and then the tax issues come next. I find investors often let tax investors drive the bus and that sometimes leads them astray.
Being a life long RE guy, my nest egg is probably 60% RE 40% stocks and mutual funds with a smidgeon of life insurance thrown in. So I see the advantages to both. I am a big proponent of diversification. Recent events prove the value of diversification. When Covid hammered my equities, my high equity well performing rental portfolio saw NO impacts. I have collected 100% of my scheduled rent payments during this pandemic. I was happy my rental portfolio was there steady and solid as the Dow went up and down a couple thousand points a day.
Based on your posts, I understand you are a thoughtful knowledgeable investor. It’s a pleasure discussing investing with you.
Even though I am only a hundred miles from Atlanta, I don’t know it at all. I know it is a good place to invest. Perhaps we can partner on something in the future.
I am very against 401Ks because you can only choose from crappy options that have heavy fees.
I don't really like Self Directed Roths or any tax sheltered retirement accounts either because you are subject to UDFI (more details below) and cannot leverage your investment which is a pillar in real estate investing. If you want to do one here is a big list of them. Knock yourself out but I cashed out mine a while ago because I plan to live off my cashflow and retire well before the Government allows you to tap into your retirement account.
If you have distrust on where this country is going you need to expect that taxes will go up in the future. How else will we pay out for all these bank bailouts and quantitative easing.
What is the largest source of Revenue for the US IRS?
401K, SDIRA, IRAs, even Roth’s when not if they can change the tax laws. Basically qualified retirement money. People are not spending it and you can bet the IRS is going to get it.
You will pay taxes now or later and you will likely to pay more taxes in the future because you will make more money... so pay it now. Most people think they will be in a lower tax bracket in the future because they plan to downgrade their lifestyle... this is again incorrect money myths that are so prevalent.
By taking you money out early you will incur a 10% penalty but if you understand how you can easily get 20-30%+ returns in real estate a year that 10% penalty is nothing. You can recoup that in 6-18 months.
It's a no brainer... the numbers don't lie. Do the math.
Yes taking money out of your retirement account is a sin for most people.
Just make sure you don't buy jet skis and put it in cash flowing assets like rentals or syndications. Or start a business if your are exceptional at business.
QRPs or qualified retirement plans (Solo 401ks, checkbook IRAs, etc) are the answer to that person with a bunch of money in their existing 401K or IRA.
It's pretty typical that someone listens to the Simple Passive Cashflow podcast, signs up for the investor club, and books a free intro call has 200k-600k locked up in garbage retail investments AKA 401K.
Stop whatever you do don't roll over an old employers 401K into your current employers 401K. If you have money in your current employers 401K its stuck there. You need to quit your job. Well there is this one obscure tactic if you live in a Red state that could work but for you it's easier to take a loan from the existing 401K to start investing in hard assets.
Anyway let me know you would like a referral to my checkbook ira contact. Or check this out to get a free book go to simplepassivecashflow.com/qrp
If you are conservatively using prudent leverage and finding decent deals there is no reason you should not be able to retire in 10 years or less and thus negating the very reason for these accounts that you can't touch till you are old.
When you have money in these accounts it sounds good that you are not taxed on gains but you are restricted from getting a Fannie Mae loan. Using SDIRA's you have to get second tier financing options because its more risk for the bank, for example, a Roth IRA can buy real estate on leverage, however, will need a non-recourse loan which is often a fraction high-interest rate and lower LTV. No Bueno!
Caveat: If you are late to the game and already have a 401k over $100,000 then you should convert it to a solo401k. At that point, you should think about putting it into a syndication since you are restricted on how you can leverage it.
I work with people to come up with a strategy to withdraw their 401k to minimize taxes. Sometimes we need to get creative with oil & gas investments, land conservation easements, or bonus depreciation.
@Jordan Burnett, I know this is really only adding to Arn's and Greg's answers, but things to consider, and why seeing other people will likely have very little correlation to you:
- How long is the hold period? Was bonus depreciation and accelerated depreciation utilized through Cost Seg or not?
- If an example you are given has cost seg over a 3 year hold, it will look vastly different than no cost seg and a 10 year hold
- How much other passive income does the example have? How much do you have?
- If the example is not QREP, but has a boat load of passive income and you don't, their results are of no value to you.
- Then you get into what other write offs is the example taking advantage of that allows them more or less tax benefits to their holdings. Some investors are exclusively concerned about tax benefits and not the returns. They just want the write-offs, and are looking for deal types that might yield as high of returns pre-tax, but are somehow structured to give that investor the tax benefit they are looking for.
- You can also get into what is the basis allocated to each investor. It is typically your cash contribution, but depending on how and where things are allocated, you could have more or less at risk basis and therefore tax situation will vary.
Unfortunately, at the end of the day, no one knows, and no examples will realistically give you a good indication of what you can expect. There are way too many variables at play.