Tax benefit comparison - direct purchase vs syndication

[Shriraj Shah]

I am trying to analyze whether to purchase an investment rental property in a SFH/MFH on a turnkey basis or via a real estate syndication. Can someone help understand pros and cons from the tax perspective for the same?

I do understand that if I am buying and managing the property myself, all my direct expenses to manage the business are tax deductible, but since I'm thinking of investing on a turnkey basis and planning to hire a property manager for day to day operations, following would be tax deductible as a passive investor.

• Mortgage Interest
• Property Tax
• Property Management Fee
• Depreciation
• Insurance
• Possibility of 1031 exchange (Future)

When investing via a real estate syndication as a limited partner:

• 20% of the pass through income from the LLC is tax-deductible

The Syndication LLC obviously would be taking the tax benefits of depreciation, property tax, mortgage interest deductions etc., but as a passive investor, is it more beneficial to invest directly in real estate than investing via a syndication? Is there a good tool to analyze both deals to figure out which would be more advantageous?

[Tony Kim]

Originally posted by @Shriraj Shah:

I am trying to analyze whether to purchase an investment rental property in a SFH/MFH on a turnkey basis or via a real estate syndication. Can someone help understand pros and cons from the tax perspective for the same?

I do understand that if I am buying and managing the property myself, all my direct expenses to manage the business are tax deductible, but since I'm thinking of investing on a turnkey basis and planning to hire a property manager for day to day operations, following would be tax deductible as a passive investor.

• Mortgage Interest
• Property Tax
• Property Management Fee
• Depreciation
• Insurance
• Possibility of 1031 exchange (Future)

When investing via a real estate syndication as a limited partner:

• 20% of the pass through income from the LLC is tax-deductible

The Syndication LLC obviously would be taking the tax benefits of depreciation, property tax, mortgage interest deductions etc., but as a passive investor, is it more beneficial to invest directly in real estate than investing via a syndication? Is there a good tool to analyze both deals to figure out which would be more advantageous?

Here are my initial thoughts on your post. Although tax is important in general, in my mind this consideration should be relatively low on the totem pole when deciding between TKs vs syndications. If you go with a proper TK operator, your passive income should be greater than zero starting from the first year. So whether or not you are passive or an active participant shouldn't really matter. Also, even if you do happen to have a passive loss your first year, it should be very minor. IMO, it's not much of a consideration because all expenses are subject to the same rules of deduction regardless of whether you are an active participant or not. The only difference is whether or not you'd be able to offset against your ordinary income...and that's also assuming your income level is under a certain amount (my apologies if I'm pointing out something you already know).

As for syndications, as long as we are talking about equity purchases of commercial property and not debt or some of the other fancy syndications out there like secondary market litigation or insurance, you will have very large passive losses starting from your first year. But again, as a non-active participant, you will have to carry these PALs forward and offset them against future passive income and not your ordinary income.