Allowable Deductions for Limited Partners

[Nick Vollrath]

Can anyone explain what deductions are allowable as a limited partner in a real estate deal vs. actively owning/managing a property? For example, if someone creates an LLC through which they invest in limited partnerships, are they able to deduct expenses related to the management of their LLC, e.g., mileage to REIA meetings, business meetings or travel, etc?

[Lance Lvovsky]

Originally posted by @Jeremiah Mon:

I hope I'm not too late on this topic @Nick Vollrath @Ashish Acharya @Lance Lvovsky

Situation

•  How can my investors take advantage of the new tax loopholes: bonus depreciation, section 179, cost segregation, etc.?

Background

• As a syndicator, I want to offer some property depreciation to my limited partners as bonus for investing with my company.
•  I'm an aspiring MREI, and I know I should be discussing these issues with a realestate/corporate CPA because it can be quite lengthy, too much for a forum post; however, I'd like to get primer from experts here in Bigger pockets. 

Assessment

• Reading Joe Fairless book Best Ever Apartment Syndication Book, he notes that I can offer some depreciation to my limited partners.
• As a "Professional Real Estate Investor," I know that I can take advantage of all the tax depreciation noted above, but my limited partners do not have that title.
• My syndication will mostly be 506 B, if this fact matters. 
• I want to take some of the depreciation for myself to offset my personal household's nonpassive income sources and give the rest to my investors.
• Cost segregation vs section 179 deduction?

Recommendation

• How can I provide depreciation to my investors?
• What other questions should I be asking?

Thank for every second of your time to help!

-Jeremiah

You will need to engage a CPA who can advise you accordingly on each matter above. It is impossible to get specific answers here - the best professionals will not be giving you responses here because they understand the value of their advice, and understand that we need to get paid for our professional advice. With that being said, I am happy to provide general recommendations.

1. There are ways to structure a Partnership for a Real Estate syndication to specifically allocate items of income/deductions, such as depreciation. Partnership structures can be very complex, such as waterfall calculations, specific allocations, basis adjustments, etc.

2. Cost segregation is different from 179. A cost segregation study identifies assets that can be depreciated on a quicker schedule. This translates to an after tax cash flow increase to you and your investors. Ideal for larger residential properties or commercial properties. 179 is immediate expensing of certain assets, subject to limitations.

3. When you decide to engage a CPA firm, be sure to also ask about their understanding of working with syndicators, collaboration with attorneys as to the legal documents, and understanding of cost segregation studies.