Syndication Tax Question

[Sam Liberow]

Hello, Some clients have been interested in investing in a syndication deal using their self directed IRA funds. When discussing it, the following came up that I’m very curious about. If I’m a general partner/sponsor of a syndication, can I control how much depreciation is given to investors/limited partners? The reason I ask is because a handful of clients that are interested in investing are using self-directed IRA funds (through Pensco or Entrust), and therefore cannot take advantage of the depreciation - being that its retirement money and they don’t have deductions/losses to use. That being said, is there a way to use the depreciation that they “can’t” utilize, and let benefit the investors that can use it?

[Michael Plaks]

@Sam Liberow

There's misunderstanding of how this works. All deduction, including depreciation, are taken at the partnership level - before the result is split between partners. Partners do not get depreciation deduction as a separate item. Depreciation is baked into the overall gain and loss, and they get their % of the overall result via K1s.

Example (numbers are not realistic, just for an example):

• 10 partners buy a $1mil apartment complex, $100k apiece.
• the rent from the complex $400k
• all holding and operational costs + repairs etc  $350k
• depreciation $100k
• overall result: minus $50k loss for the partnership; $5k loss to each partner

Notice that depreciation is not separately assigned to partners, it is part of the big calculation.

What you're correctly saying is that non-IRA partners could benefit from the $5k loss, but IRA partners cannot. Well, this just comes with the territory. The flip side is that IRA partners will not be bothered by positive income in other years or by capital gains at sale, while non-IRA partners will.

Can you change distribution of gains/losses between partners other than strictly by % of their investment? Between the syndicator and passive partners - yes, with substantial hoops to jump thru. Between passive partners (like IRA and non-IRA partners) - no, as there would not be any economic justification for that.

Before you contemplate those uneven distributions, talk to an experienced REI tax accountant, as there will be some unintended tax consequences, especially at sale, not to mention the complexity of arranging it and potential friction between the partners. It's far easier to educate the IRA partners on their tax consequences.