Tax questions on Syndication exit

[Peter Lampione]

Thanks for all the great info on this forum.  I found a few posts similar to what I'm looking for but couldn't find the exact answer so creating this post, apologies if it is fully answered somewhere.

Trying to understand the specific treatment of suspended losses against syndication capital gains and depreciation recapture.  As an example:

- Invest in Syndication 1 in Year 1 for $100,000, realize $60,000 depreciation

- Invest in Syndication 2 in Year 2 for $100,000, realize $50,000 depreciation

There are typically distributions that would use up some of the depreciation losses, but ignoring them here for simplicity (I have many deals that have created a lot of losses).

- Syndication 1 exits in Year 3 for $150,000.  There is a gain of $50,000 and depreciation recapture of $60,000.

From year 1 and 2 there is a total of $110,000 is suspended losses.  Would that $110, be able to offset the $50,000 gain (taxed at cap gain rates), and the $60,000 taxed at 25% recapture rate?

I have read many places where people mention the losses need to be generated in the same year as the sale in order to offset the sell, but in other cases they imply that prior year losses can offset both gains and recapture?

Thanks,

Peter

[Lane Kawaoka]

All investors will have to pay back the depreciation recapture (losses taken throughout the hold) and capital gain (the big payout on the end which is sale minus cost basis). But don't despair because although this is the case when you look at it myopically, in reality most investors go into multiple deals accumulating 100s of thousands of passive activity losses in their first few years investing. Those losses do not go away, but they become suspended to be used to offset future passive income and sales/capital events like this in the future. When you exit a deal, what normally ends up happening (like Tom Brady keep winning more Super Bowls) is that you go into two more deals (with now double the amount of capital) and you will likely find that with those new K1s you could result in you having way more passive losses you began with If you can see where this is going... yes, experienced investors with a lot of capital deployed might have 500k-1M+ suspended passive losses and have not paid taxes in years and do not appear to pay taxes for years! (you can find how much suspended passive losses you currently have on your IRS Form 8582 - which your CPA is likely not giving to you and in that case you should get a new one)

Another example: Assume you invest $100,000 in a syndication and the cost segregation yields $20,000 of depreciation. You hold the asset for five years and it is sold for $150,000. You have $50,000 of capital gain and $20,000 of depreciation recapture. Assuming your capital gains tax rate is 20% and you made no further investment, you would owe tax of $10,000 on the gain and $5,000 on the recapture.
Now assume you took the $150,000 and invested it in a new syndication and got the same 20% cost seg, so $30,000 of depreciation. The new depreciation would first offset the $20,000 of recapture then the remaining $10,000 would offset some of the capital gain from the previous sale leaving you with $40,000 of gain. You would pay 20% tax on the $40,000 and the tax owed would be $8,000 rather than the original $15,000. If you have other passive loss that you have been carrying from other investments, that could be used to further defer and reduce the tax.