All Forum Posts by: Bruce D. Kowal

Thanks, Aaron.  How about a "Vote"?  Best.

Thanks, Aaron.  Check out my post today on reading the balance sheet.  I call it "Inside Baseball".  Kindly Vote on my posts, please.

We noted that Members of LLC's have the statutory right, under State LLC law, to get copies of tax returns and financial statements. We referred to Colorado, as an example. Here are the similar provisions for New York State.

New York State LLC Law §1102

Go to this link, the IRS Form 1065. Scroll down to page 6, Schedule L, Balance Sheet per Books.

https://www.irs.gov/pub/irs-pdf/f1065.pdf

Now that you have obtained a copy of the LLC tax return, in accordance with your rights, let’s focus on two elements of the balance sheet: Line 1 Cash, and Line 13 Other Assets.

[The BIG number you want to look at would be on line 7a and 19a - Loans to and from Partners and Related Parties. Another post!]

[1] Line 1 Cash. Does this LLC have any cash? Simple question, right? I have seen tax returns where the cash is not stated. The Managing Member may respond that the cash is held "in escrow" by their Attorney. Now, go away and don't ask any more questions . . .

You have a right to ask for a copy of the year-end bank statement. December 31, 2024. The ending balance should agree with what is on the tax return. Period. If you are told that the cash is held by the attorneys in escrow, ask the attorneys to verify, and mumble something about IOLTA, and whether interest is being paid. In any event, there is commingling going on, which is not good. [If you ever want to see an Attorney sweat, tell him that you think there is an IOLTA violation]

[2] Line 13 Other Assets. Look for the components of this. What are you looking for? Syndication Costs. The money spent on forming the LLC and, importantly, the commissions paid to salesmen to sell the LLC. Those commissions are usually ten percent, and should be disclosed in the selling documents. Thus, if the LLC raises $3M, you would expect to see $300k in commissions.

Why are we looking for this? Syndication Costs, by tax law, IRC §709, must be shown as an asset, and cannot be written off in any way. No amortization. This means it can’t be expensed, which increases losses [which is favorable]. So, the Managing Member, by not showing this on the balance sheet is NOT following the law. And the CPA who prepared the return is, uhhh, acting unprofessionally. Secondly, perhaps commissions in excess of what is disclosed in the selling documents, are paid. Who wants to disclose that number?

Simply put, Syndication Costs are the amount of sales proceeds [the money raised in the Offering Memorandum] which are NOT being invested in property acquisition.

So, while this is often overlooked to a reader of financial statements, for those of us who actually prepare these returns, it’s a telling sign of the integrity of the Managing Member. Non-amortizable. Includes sales commissions, securities registration fees, costs of marketing the interests, broker fees for selling interests, sales literature printing. IRC §709(a), Regs.§1.709-2(b), Regs. §1.709-2(c).

This is "Inside Baseball".

[Disclaimer: This information is a service to Clients and other readers for educational purposes only. Nothing in this post should be construed as, or relied upon, as legal advice or as creating a CPA-client relationship.]

Everyone on BP is entitled to their own opinion.

Really?  From Upwork?  I tried to use someone from Upwork for Facebook marketing.  A disaster.  They got paid, though. 

The bottom of Form 1065 page 1 will list the name of the preparer.  At the very least it should be a CPA, and not "Jiffy Tax Preparation Service".

Not sure if you recall the Madoff fraud.  HIs CPA, the firm that audited this billion dollar investment company, was a one-person firm operating in a strip mall, next to the 7/11 and the cleaners.  Any sensible Investor would take a look at that and run . . .

Understanding Your Rights as a Limited Member in Real Estate Syndications 📊

As a CPA specializing in real estate taxation, I frequently advise clients on their rights to get information as Limited Members in real estate syndications. Here's what you need to know about accessing crucial financial information.

KEY INFORMATION RIGHTS 📑

Limited Members have statutory rights to examine:

• Three years of tax returns

• Financial statements

• Bank statements

• Compensation details

Comment:  this is BIG!!! You can get the LLC tax returns.  And you will also identify the CPA who prepared the returns.  That may be useful.

[Here is a link to the Colorado law for this purpose.  Other States will have the same: Colorado LLC Law - Member Rights]

WHAT CONSTITUTES A "REASONABLE PURPOSE"?

Courts support information requests when:

• Valuing your membership interest

• Verifying distributions

• Ensuring tax compliance

• Investigating potential management concerns

FOLLOWING THE MONEY 💰

Limited Members can request detailed information about General Member compensation, including:

• Schedule K-1 distributions

• Guaranteed payments

• Management fees

• Consulting fees

• Property management fees

• Acquisition/disposition fees

• Development fees

Comment:  there are soooo many ways the Syndicator can be compensated, from a straight distribution of cash, to salary, or fees.  You want to check that all of those are permitted in the Operating Agreement.

VERIFICATION RIGHTS 🔍

You have the right to verify:

• Year-end bank statements

• Cash balance reconciliations

• Distribution calculations

• Capital account accuracy

Comment:  nothing better than to compare an actual bank statement with the cash balance shown on the balance sheet of the tax return.

PRACTICAL TIPS

Make specific, focused requests

Document your business purpose

Reference operating agreement provisions

Keep requests professional and relevant

Accept reasonable redactions

PROTECTION STRATEGIES

• Review operating agreements before investing

• Understand your statutory rights

• Maintain detailed records

• Work with qualified professionals

Remember: Information rights are fundamental to protecting your investment. Don't hesitate to exercise them professionally and purposefully.

In another post I will show you how to analyze the balance sheet on the tax return, Schedule L, for warning signs of possible "problems".

[Disclaimer:  The information provided in this post represents my professional observations as a CPA and real estate investor. While I aim to provide valuable insights based on my experience reviewing numerous syndication deals, this post is for educational purposes only and should not be considered legal advice.]

🏠 vs 📈 - A Fresh Look at Real Estate and Dividend Stocks

Hey there, fellow investors! As a CPA who lives and breathes real estate taxation, I've noticed something interesting that I want to share with the BiggerPockets community. You might be surprised, but your rental properties have more in common with dividend-paying stocks than you think! 🤔

Let's explore this idea together...

💰 The Cash Flow Connection
Think about it - both investments are essentially money-making machines. Just like how Johnson & Johnson or Coca-Cola send you quarterly dividend checks, your tenants are sending you monthly "dividends" in the form of rent. Both generate passive income streams without you having to clock in at a 9-to-5.

🏗️ Building Equity While Others Pay
When your tenant pays rent, they're helping you pay down your mortgage - building your equity. Similarly, quality dividend-paying companies often retain some earnings to reinvest in their business, increasing the company's (and your) value over time. In both cases, you're growing wealth while collecting regular income.

📊 Market Appreciation vs Stock Growth
Here's where it gets really interesting! Both assets have two ways to make you money:

1. Regular income (rent/dividends)
2. Appreciation (property value/stock price)

🛠️ Control Factor
Now, here's where real estate often shines - you have more control! You can't call up Apple's CEO and suggest improvements, but you can definitely upgrade your rental property's kitchen to command higher rent. That's a powerful advantage that many financial advisors might overlook.

💡 Tax Advantages
This is where my tax brain gets excited! Both investments can offer tax benefits, but real estate typically has the edge. While qualified dividends get preferential tax treatment, real estate offers:

• Depreciation deductions
• 1031 exchanges
• Cost segregation opportunities
• Home office deductions for your management activities
• And more!

🎯 Leverage Power
When's the last time your broker let you buy $500,000 worth of stocks with $100,000 down? That's right - real estate's leverage power is unmatched. While margin accounts exist for stocks, they're typically more expensive and risky.

🤝 A Place for Both
Here's the thing - it's not really an either/or situation. Your financial advisor isn't wrong about 401(k)s, but they might not fully appreciate real estate's benefits. A diversified portfolio can include both! Think of it as different tools in your wealth-building toolbox.

🎓 The Knowledge Edge
What makes both investments successful? Understanding them deeply. Just like you wouldn't buy a stock without researching the company, you shouldn't buy a property without knowing the market, running the numbers, and understanding your tenant base.

👀 Risk Management
Both investments require risk management:

• Stocks: Company performance, market conditions, economic factors
• Real estate: Property maintenance, tenant quality, local market changes
  But guess what? The principles of diversification apply to both!

💭 Final Thoughts
When your financial advisor pushes back on your real estate investments, remember this: You're not just "buying a house" - you're investing in an income-producing asset, just like buying shares in a dividend-paying company. The main differences are that you have more control, better tax advantages, and the power of leverage on your side.

🌟 Pro Tip: Next time someone questions your real estate investments, ask them if they'd turn down an opportunity to buy shares in a company that:

• Pays monthly dividends
• Lets other people pay off their investment
• Offers significant tax advantages
• Can be improved to increase returns
• Can be bought with 80% financing

Because that's exactly what you're doing with real estate!

Remember, the most successful investors often understand and use multiple investment vehicles. Your rental properties are working alongside those dividend stocks, not against them.

🎩 The Buffett Connection

Warren Buffett's investment philosophy aligns beautifully with the principles of income-producing real estate, particularly through his well-documented love of dividend-paying stocks.

🎯 The Buffett Dividend Strategy

Coca-Cola remains one of the best examples of Buffett's philosophy in action:

• 1988-1989: $1.3 billion investment
• Held for 30+ years
• Growing dividend income stream
• Shows the power of buying quality assets and holding for cash flow

💳 The American Express Story

• Buffett began buying AMEX in 1964 during the "Salad Oil Scandal" crisis
• Made a larger investment in 1991
• Berkshire now owns about 20% of American Express
• The investment has generated billions in dividend income
• Perfectly demonstrates Buffett's principle of buying great companies during temporary troubles (just like smart real estate investors who buy in good areas during market dips!)

🎯 The Real Parallel for Real Estate Investors:
AMEX and Coca-Cola together show Buffett's core principles that align perfectly with real estate investing:

1. Buy Quality Assets During Opportunities

• AMEX during the crisis
• Coca-Cola during market pessimism
• Just like buying good properties during market corrections!

1. Hold for Long-Term Income

• Buffett has held AMEX for nearly 60 years
• Held Coca-Cola for 35+ years
• Similar to buy-and-hold real estate strategies

1. Focus on Cash Flow Growth

• Both AMEX and Coke have consistently increased dividends
• Just like raising rents over time in quality properties

1. Look for Moats

• AMEX: Strong brand and network effects
• Coca-Cola: Unbeatable brand power
• Like owning property in irreplaceable locations

💡 The Real Estate Advantage
While Buffett mastered dividend investing, real estate investors can do even better because:

• We can use significant leverage safely
• We control our asset's improvement
• We get superior tax advantages
• We can force appreciation through improvements

What do you think, BiggerPockets community? Have you noticed these parallels in your own investing journey? Let's discuss in the comments below! 🎤 

[I know that this is a bit long, but i have tried to keep it lively with cutesy emojis.  Better than falling asleep in a Hotel Conference Room at an all day affair, right?  Also, some of you will need a little pushback against Naysayers who will encourage you to stick with your Qualified Plan.] 

That's the Big Question, Scott.  IRS criteria shift and move.  

I used an 8082 several years ago with no blowback.  And I was greatly relieved when the three year statute of limitations had expired.  It was three years of "terror" wondering if IRS would follow up either with the Partner or the Partnership itself [to answer your question].  

In that case, the GP, who was a cheating SOB, issued a K-1 allocating cap gains [§1231 gains] to my Client, who was a minority LP.   The allocation was non pro-rata.   While at the same time taking a chunk of cash.  In other words, my Client got hit with a large cap gain, but no cash.  And the GP got cash, and low reported gain.  Pretty nasty, huh?  

So, that 's why we used Form 8082. I imagine that if ALL the LP"s protested with Form 8082, the IRS might have taken note.

I need to write some posts about the Tricks and Traps that some syndicators [not you, of course] use to the detriment of the LP's.

But the Form 8082 is your best friend.  As long as you file it, you have protection from the charge of fraud.

Tip: if you file Form 8082 to protect yourself, send your tax return in by mail.  A nice, large paper return.  With lots and lots of schedules no one asked for.  Attach Form 8082 as the last page on your 100 page + paper return.  Chances are it will never get keypunched.  But you complied with the notification requirements.

Cost Seg studies will put depreciation on steroids and likely lead to a "Tax Loss".  By "Tax Loss" I mean that it is likely that without depreciation your property is cash flow positive.

If you Materially Participate in the management of your portfolio of rental properties, that loss will be treated as Non-passive, and will flow through to page one of your Form 1040 tax return.  

So far, so good.  If you are not Materially Participating, the loss will be reported on Form 8582 and like be classified as "Unallowed".

The ordinary loss from Schedule E cannot offset the Schedule D capital gains. 

They remain distinct on Form 1040 with different tax treatment

Only capital losses can offset capital gains (except for the $3,000 allowance)

So even though material participation makes the loss non-passive, it's still an ordinary loss that cannot offset capital gains from stock sales on the return.

The only way capital losses can become ordinary is upon the sale of your property, and that loss could offset your W2 salary.  Your investment property is called §1231 property. Business / Investment property.  It gets the best treatment.  Gains are capital and losses are ordinary.  But even then, a §1231 loss cannot offset capital gains.

Clear as mud?

As for your Index funds, if you were trading indices such as SPX, you would have the favorable tax treatment accorded to §1256 Contacts:  60% of gains are Long Term Capital Gains, and 40% are Short Term capital gains. Otherwise, if you are referring to ETF's such as Spiders, or QQQ, the the holding period rules apply.