Passive Losses, NIIT, and CRE Syndication

[Jeffrey Scholz]

Hi Bigger Pockets,

I've seen bits and pieces of information about this in various places, but I'd like to ask people who have actually gone through this procedure.

I anticipate my rental properties will accumulate about 10k in passive losses per year for the next few years (courtesy of of the 27.5 year depreciation schedule -- not due to pre-tax negative cash flow). I'm above the passive loss threshold and subject to the net investment income tax (and I'm in a high tax city). I'm single and don't anticipate marrying a real estate professional any time soon, so those losses are locked up.

Questions:
1) Regarding Net Investment Income Tax... Do my passive losses on the properties offset the stock dividends and bond interest from other portfolios -- such that I can report no net investment income and thus avoid the NII tax? I realize I will still have to pay income tax on the bond interest and long term rates on the dividends, but my understanding is that I can dodge the NIIT surcharge if the bond interest + dividends + rental passive loss is negative. Is my understanding correct?

2) Can I offset the passive losses with an investment in a syndication like what they offer in CrowdStreet? Assuming I am correct about question 1, I would not want to offset all of the losses, just enough to keep my NII close to zero.

3) It seems to me that passive losses are "wasted" if I 1031 exchange the property. Sure, I lowered the taxable appreciation on sale, but that seems to be pointless if I won't pay taxes on the appreciation anyway.

Overall, my strategy would be to balance my investments such that my NII from all my investments is close to zero on an ongoing yearly basis (I realize this is optimistic, but I can at least try to get close). If it comes time to sell a physical property, I want to have accumulated as little passive loss as possible to avoid trapping the loss in a 1031 exchange.

To give a concrete example, if I buy a 200,000 house with a land value of 40,000, I depreciate 5,818 per year (assume cash flow is small due to buying the house with a mortgage). If I have a syndication that effectively throws off 5,000 per year, and my portfolio (stocks + bonds) income is 818, my net investment income is 0 so I pay no NIIT. Effectively, I have tax-free cash flow from the syndications and tax-free appreciation from the physical properties (if I 1031 exchange them before the 27.5 years is up and donate/bequeath them in my will). Also, I wouldn't be paying the extra 3.8% on the investment income -- or at least not too much of it. Over time, I would want to keep these ratios while scaling up to minimize taxes.

(I realize I cannot control the outcome of investments with that level of precision, but I'm using those numbers to illustrate a point).

Feed back would be much appreciated! Thanks!