Loss from a Syndication investment

[Mukesh Yadav]

Hi All,

I have a question for those of that are tax savvy. If you have a loss from syndication investment ( the entire project went bust) can you use that loss (from the final K-1) to offset your regular W-2 income ? 

We all know that generally passive activity losses can only be used to offset passive activity income, BUT, if if the project/investment is completely closed out and final K-1 generated with a loss, in that case can that loss be used to offset regular W-2 income ? 
Hope I have articulated the question properly...

Mukesh

[Michael Plaks]

Quote from @Duke Giordano:

Revisiting this.  With the advent in real estate syndication's of the unfortunate unplanned capital calls for limited partners I think this becomes more important to understand the nuances.  Are there any CPAs or accountants willing to speak in general terms as to how syndication losses at the time of a real estate syndication disposition could be taken advantage of?  As the original poster said obviously there's limitations to passive losses or depreciation etc. to only offset passive income.  But with many deals facing the stress these days for deals where investor loses their original capital what are the implications or options and the tax treatment of that, and how would it be different than just a simple depreciation which is limited by passive losses?  What circumstances could this offset W-2 income even for those who are not real estate professionals?

Losses of principal capital investment in syndications is something none of my many clients ever faced, except for Oil & Gas and (one time) a fraudulent syndication. Returns can fall short of proforma for sure, but not losing principal. I'm sure it happens somewhere sometimes, I just don't think it's a new trend. Hopefully not.

If it happens, it's normally a capital loss and does not help to offset W2 income, because net capital loss is limited to just $3k per year.

Can there be exceptions? Yes, in some cases - and I would caution that such cases are rare - it could be a theft/casualty loss or an ordinary business loss. Definitely not a loophole and not what we call a tax strategy.

Tax-wise, here're a couple of posts explaining the general tax consequences of real estate syndications:
https://www.biggerpockets.com/forums/51/topics/839015-are-sy...
https://www.biggerpockets.com/forums/51-tax-legal-issues-con...