Syndication losses against active income

[Michael Plaks]

Posting my response to a client's question, in order to get my colleagues input on this issue.

Q: I have an investor who is actively investing in real estate on their own & have no f/t job. So spending enough time in the industry to claim the "active RE pro" status on the tax return. Can they claim their income/loss from syndications where they invest as LP against their active income? 

A: I despise the word "syndication." :)  It recently became as meaningless as "business" or "investment." 200 people contributing $50k each for a large commercial deal is called syndication, and so is 3 friends putting $10k apiece as a down payment for a duplex. This distinction matters.

For tax purposes, there's a concept of active participation. It basically means participating in management decisions, such as approving tenants or lease terms, approving capital improvements and contractors, and so on. This is likely to be a yes in a 3-people scenario and likely to be a no in a 200-people scenario. 

Another requirement for active participation is owning at least a 10% interest - which again eliminates large syndications.

The third requirement for active participation is to not be a limited partner. In case of an LP it's a deal-breaker. If it was an LLC, as opposed to an LP, then there is significant controversy as to whether or not LLC members are treated as limited partners.

Now, to your question.

Without active participation (which is your case), passive losses from syndication can only offset passive income. So, if your client has some positive income (including capital gains) from his personal investments - he may not want to claim RE Pro status and use these gains against his K1 losses.

If he manages to qualify for active participation (a small syndication via an LLC, case by case) - then his K1 losses may offset his other income, up to $25k, as long as his income is under $100k. This $25k window is phased out between $100k and $150k income and then disappears.

PS. This is why we accountants have job security.