Accredited Investors & Taxes in Multifamily Syndications

[Elizabeth M Williams]

I've had a number of enquiries via my site by people who'd like to invest in one of our syndication deals, but can't due to either not being accredited, or the majority of the deals being open to accredited, not sophisticated investors.

I'd just like to reiterate that for those who are keen to invest in multifamilies, if they don't meet the income requirements, they can become accredited by taking the Series 65 exam, which doesn't require registration/sponsorship under a broker/dealer. SEC exams are pretty rigorous (I'm an SEC Registered Rep) but they are a great option for some.

The other alternative is to find deals for sophisticated investors. We have some on offer from time to time, as well.

Re taxes, I saw a thread going through the tax ramifications of investing in multifamily syndications. As has been stated and is likely known by most of you, the distributions are taxed as passive income, similar to if you owned a single family. Multifamily syndications have the added benefit of bonus depreciation, which can result in losses, a great tax advantage for investors who are high earners, reducing their overall tax basis. 

Upon exit, the taxes are treated as long term capital gains, and there aren't many opportunities to 1031 into new deals, though a few of our operators are actively pursuing this, and one has started offering it, which is amazing! So the scenario would be to invest in a syndication with an operator, then on exit, roll into the next project with that same syndicator. Given that the distributions comprise around 40% of overall returns on a deal, a lot of investors simply opt for the capital gains on the remaining 60%, or use the passive losses to offset other passive gains. Like other types of investments, a conversation with your CPA can help with tax planning, as each individual's situation is different. 

There is another alternative for taxes, as well. Should you wish to really dig into this, you can also consider getting Real Estate Professional Status (REPS). This is a strategy best suited for those who have a mix of single family rentals/small MF in the mix, as well. By qualifying for this status, you would be able to convert your passive income into active income, and derive the associated tax benefits. The requirements are relatively stringent, but suitable for some.

Lastly, it makes sense for some to utilize their IRA's to invest in syndications, to mitigate, eliminate or defer taxes altogether, depending on the plan you invest from. If you don't already have an existing self-directed IRA, but have an IRA that allows for this conversion, the process is pretty straightforward, and allows for additional tax advantages. Again, this is worth a discussion with your CPA, to determine if this strategy makes sense for you.

Feel free to reach out to me if you'd like to hear more about multifamily syndications, in general, or our current offerings. 

[Arn Cenedella]

@Elizabeth M Williams

Nice post.

As a LP investor and a a GP lead sponsor syndicator, i believe it is very important to emphasize the significance of the “passive” nature of income and losses obtained through syndications. I find this significance is often “glossed over” and simply not discussed.

The losses that show up on a syndication K1 primarily due to cost seg and bonus depreciation are passive losses and can only be used to offset passive income (with the exception provided real estate professionals as you note above).

To my understanding, there are only two sources of passive income:

Rental real estate

Income from a business you own that you do not materially participate in.

That’s it.

Tax law is complicated. Each investor must obtain professional tax counsel to determine what the impact of these passive losses may be on their tax bill. Any passive losses that can not be used are simply carried forward until they can be used.

It’s complicated.