W2 and a General Partner in Syndication- Can I take my K1 loss to offset W2 Income?

Question

Hi Folks,

Need some clarification on this complex topic.

There is a lot of discussion on these tax nuances in BP forums, so I am happy to read any particular thread you can point me to.

Basically I have a W2 (above income limits) and I am a General Partner in a multifamily deal.

I have received 2 K1s from this deal (one as a GP) and another as an LP (since I put in some of my own money).

Am I allowed to take the K1 losses from this deal to offset my W2 income?

Additionally, I also have another K1 (LP only)- Since I am not a GP in this deal. Can K1 losses from this LP only deal be also taken to offset W2 income?

Appreciate your inputs on this and thank you in advance.

Rohan

Andrew Freed · Answer

@Rohan D. - The main question here is do you qualify as a real estate professional according to the tax code. If you do then you can utilize losses to offset your active income but if not, you are limited with how much depreciation you can utilize to offset your active income. Given that you have a W2, you most likely do not qualify as a real estate professional since it has to essentially be your main gig.

If you wanted the REP designation in the future, you can have your signficant other qualify and that would allow you to qualify (e.g. a stay at home wife) or you can take a consulting role resulting in the real estate being your full time gig. Hope that helps!

Michael Plaks · Answer

@Rohan D.

If you only have these K1 investments, both with losses, and no other real estate investments - the answer is probably no. Except for whatever losses are on the GP K1, but even they require more discussion. Basically, your question does not have a generic answer.

Here's some reading to start:https://www.biggerpockets.com/forums/51-tax-legal-issues-con...https://www.biggerpockets.com/forums/51-tax-legal-issues-con...

Account Closed · Answer

Hey Rohan, You generally cannot use K-1 losses from your multifamily syndication to offset your W-2 income unless you meet specific IRS requirements. These K-1 losses are typically considered passive losses, which means they can only be used to offset passive income, not active W-2 income. The main exception is if you qualify as a Real Estate Professional (REP) by spending at least 750 hours per year actively participating in real estate activities and meeting other IRS criteria. Since your W-2 income is above the limit, it's unlikely you qualify for REP status, so the losses would typically be suspended and carried forward to offset future passive income. However, if your spouse qualifies for REP status (for example, if they are a stay-at-home partner), you may be able to apply the losses to offset your combined income.

Sean Graham · Answer

In order for these losses to potentially offset your W2 income, you or your spouse would need to qualify for REPS and meet the material participation requirements. If you’re working a full time W2, it’s unlikely you’d qualify for REPS.

Austin Cheatham · Answer

As other people have stated here, the answer is probably non-deductible to offset ordinary income. These all sound like passive income deals, which would be subject to passive loss limitations.

Without being able to see your entire tax situation, it would be hard to tell. As others stated, we could look at being able to have real estate professional status, but with W2 income it would be hard to justify that for yourself.

Happy to help run through any scenarios if you need!

Ashish Acharya · Answer

No, you generally cannot use K-1 losses from syndication, whether as a General Partner (GP) or Limited Partner (LP), to offset your W-2 income unless you meet certain conditions. The key issue here is that K-1 losses from real estate activities are typically considered "passive losses" for tax purposes.

The IRS has strict rules preventing passive losses from offsetting active income unless you qualify as a Real Estate Professional (REP). Since you mentioned your W-2 income is above the threshold, it’s likely that you don’t qualify for this status, so the losses would be suspended and carried forward to offset passive gains in the future.

With REPS and 500 hours of material participation in your LTRs activity, you can release your losses from LP interest. GP is slightly easier to release but gets complicated.

*This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Rohan D. · Answer

@Michael Plaks @Andrew Freed @Sean Graham @Austin Cheatham @Ashish Acharya Account Closed

Chris Seveney · Answer

@Rohan D.

When I was in this situation the answer was no. But every situation is different but advice you are getting here is the same I was getting from two different CPA’s I use as well

W2 and a General Partner in Syndication- Can I take my K1 loss to offset W2 Income?

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