All Forum Posts by: Evan Loader

1. My apologies for the confusing explanation. Neither my CPA nor I was guessing as to the share of a state's share of a K-1. Each K-1 is standing on its own for each property/each syndication. The misunderstanding came because GP Sponsor A who is HQd in CA issued me a K-1 for a property that is based in GA with their business mailing address in CA showing on the K-1 as opposed to where the property is in GA, and the LLC was opened/registered in GA. My CPA drafted a return for CA claiming that is where I need to file for my LP share of a GA LLC and GA located property. I should not be filing any return to preserve loss carry forwards in CA just because GP Sponsor A has his main business there. My nexus is to the syndication property in GA and the LLC in GA. I should have clarified to the CPA when I sent original documents where each K-1 property is located.

The same goes for a property I am invested in KY. GP Sponsor B is HQd in NJ issued me a K-1 for a property that is located in KY but their mailing address on the K-1 shows their HQ in NJ, and the LLC was opened/registered in KY. Again, my CPA drafted a return in NJ claiming that is where I need to file for my LP share of a KY LLC and KY located property. My nexus is to the syndication property in KY and the LLC in KY. My only concern here is to preserve my loss carry forwards for when the deals exit and I can carry these passive losses forward to minimize state income taxes owed to the state where the property is located. I want nothing to do with either NJ or CA and their tax systems.

2. Easy error, I get it. This error alone was not the straw that broke the camel's back, but it didn't help. 

3. I believe he was rushing because I sent him the all documents on 1-April, once I had my last K-1. He downloaded them on 3-Apr. I followed up for a status on 19-Apr and 2 hours later he sent me this return. Something tells me he threw the return together as soon as I followed up, which led to some sloppy mistakes.

4. The CPA did calculate the number of days I was overseas correctly. The error he made was he allocated all 356 days I used to qualify for the 2020 tax year, when they have to be allocated for the tax years in which the calendar years they fall. Approx 50 days of the 356 I used to qualify were in calendar year 2021, so I have to wait until I file my 2021 taxes to take advantage of those days. There is prorated formula in 2555 that walks the preparer/filer through it. 

5. I didn't expect to have any of my K-1 losses deducted from my W-2 income because he didn't do it for my 2019 taxes, my MAGI is too high anyway as a passive investor to deduct anything, and the fact that he only deducted some of my losses from 3 of the 6 syndications just struck me as odd. At the end of the day I just couldn't in good faith agree to stay with that CPA. And I do not own 10% of any of the properties I am invested in, so good to know that info. 

The CPA responded to my termination message and said he was sorry I felt that way but offered to help if I needed his services again. Not sure if he just was too busy with other things or what, I did my homework on him and he had no major complaints filed against him in the state where he is based. Part of me wondered if he just was so overwhelmed or busy with other things that he purposely threw it together to get me to fire him, in my mind the errors were that blatant. I would hope it wasn't a circumstance like that.

So I have a tax situation that is unfortunately going to require me to have to terminate the services of a CPA and start over for tax year 2020. I am a MI resident, currently work overseas in Bahrain and take full advantage of the foreign earned income exclusion(FEIE) utilizing form 2555. 

I also invest passively in syndication deals that issue me a K-1. So my tax situation isn't super simple, but also not too complicated that a competent CPA who handles foreign earned income(from a US employer) and K-1s would struggle. I had a CPA that specializes in expats working overseas and he also handles K-1 forms(supposedly). He prepared/filed my taxes for 2019, he made a few small errors I discovered that were promptly corrected. No problem. I only had 2 K-1 forms for 2019 and both showed paper losses, he did not file state returns for either K-1 for 2019. He didn't apply any of the losses off my W-2 income(I'm not an active RE professional), which I didn't have an issue with as the FEIE is such a huge benefit I didn't make a fuss, I can carry the passive paper losses forward. 

Fast forward to tax year 2020 and I have 6 K-1 forms all showing a paper loss as well as still working overseas as a defense contractor. I submit all of my information to the same CPA. He sends me a draft copy of the returns as well as state returns for the LLC K-1s to preserve my loss carry forwards. It was a nightmare trying to make sense of it was so sloppy. He made the following errors just through a quick 30 minute scan, at least what I thought were:

1. Drafted state returns for K-1s in states where the sponsor is based for their general business as opposed to where the LLC syndication property is located. So he had drafted state returns for CA and NJ when the properties are located in GA and KY respectively. I owned up to messing this up as I didn't inform him that the K-1 didn't specify where the property is, only the mailing address for the GP sponsor in CA and NJ. He also left out other state returns to preserve losses in OR, GA and KY where I am invested. It doesn't make any sense that I would have to file in the state where the sponsor is doing their main business when the property LLC I am invested in is filed, registered and located in another state. If I am wrong about this, please tell me. He claims I have to file in those states as if the K-1 they issued was as if I am a general partner in a sponsor's main business vs a limited partner in a syndication in another state. If it was only this error I would not have terminated his services.

2. 1099 interest income from banks was mis-reported, a simple Ally Bank 1099-INT had individual CD interest income earned and then at the end of the pdf it had a composite for all interest income for all CDs/accounts. He only reported the interest income from 1 CD. A small easily correctable error, but troubling he didn't scroll down on the 1099-INT. Taken together with other errors I was not getting concerned.

3. Left out my 529 deduction to take a state tax deduction. He gave me a questionnaire prior to engaging his services that captures all of this. 

4. Miscalculated my form 2555 FEIE deduction for working overseas(The FEIE allows one to exclude from their income upto $107,600 for the 2020 tax year if they work and derive their income from working overseas). To qualify for this exclusion, 1 must either meet the bona fide residence test or meet the physical presence test. The physical presence test is much easier to satisfy, the requirement of which is one has to be overseas for 330 out of 365 days in any rolling 12-month period. If one uses a 12-month period to qualify that crosses calendar years, you have to allocate the portion in the corresponding tax years. He did not do this, he counted days from I used to qualify in 2021 for the 2020 tax year. This raises a huge red flag for audit risk. 

5. He took passive losses from 3 out of my 6 syndications and deducted it from my W-2 income(he deducted approx $19k from my W-2 income), and ignored the losses from my other 3 syndications. If I am not mistaken, isn't there a limitation of $25,000 to deduct passive losses from W-2 income but only if my MAGI is below $100,000 and completely phased out at $150,000? My MAGI(which unfortunately has to add back in the huge $100k+ foreign earned income exclusion) exceeds both of these thresholds so I don't believe I can have it deducted from my W-2 income. I am not an active RE professional either, so no benefit there. 

Taking all of these issues together, I didn't have any confidence in my return, it is completely unusable and I think I need to start over with another CPA who can handle it. Even if he corrected them, I question his competency now. So I have terminated his services and am on the hunt for a CPA that can handle real estate passive LP syndication K-1s as well as utilizing the FEIE form 2555. Any recommendations would be MUCH appreciated. Thank you. 

The current CPA is tracking it via a spreadsheet and also filed form 8582 for federal for 2019 and will do so for 2020, he did not file state forms. Since this particular CPA specializes in overseas expats as opposed to real estate investors, I will probably move to a new CPA that specializes specifically in real estate for the 2021 tax year. For 2019 and 2020 I am not too concerned as all of my K-1s still show a paper loss, but 2021 will probably start showing some gains and potentially an exit. If state returns need to be filed to ensure those suspended losses get carried forward for tax purposes for 2019 or 2020, my new real estate CPA can handle filing those returns.  '

As far as composite returns filed by the syndication GPs, I have followed up with and not yet heard back. I'm looking forward to working with a CPA that specializes in real estate syndication LPs, and am interviewing one in Texas tomorrow off the recommendation of a colleague. 

@Tushar P. I am curious, have you been an LP in syndications for long? Ever seen a deal go full cycle? Did the scenarios you warn of actually happen to you or people you know? Or is this a general concern of yours?

I ask because if a sponsor is engaging in such behavior their reputation to raise future capital is then put at risk. Especially if they don’t meet the performance projections of the PPM. If a sponsor is selling to an entity they have a financial interest in yet meets or exceeds the performance projections of the PPM, that wouldn’t bother me. It would bother me if they under performed and sold to an entity they had an interest in to take my potential share of profit as an LP. They wouldn’t get my capital again in future deals.

But it doesn’t seem like a sustainable business model of a sponsor to purposely deceive your LPs in such a manner. Word is bound to get out if a syndication sponsor engaged in this behavior. A fly by night operation, or only planning to do a deal or two, yeah I see the risk. But sponsors with a long history of performance as per the PPM I don’t see the high risk. If they meet the numbers they meet the numbers.

@Tushar P. I will return to that K-1 thread and update it with what I’ve done. Thanks.

How often is this really going on? I would think if a syndication sponsor engaged in this sort of disguised-entity buyer strategy, they would gain a bad reputation pretty quickly among the LP community.  Their investor base would disintegrate pretty rapidly. 

Also, how does one ensure that doesn't happen aside from the sponsor's reputation. @Brian Burke have any insight on this? 

@Cason Acor I would also add that a sale leaseback also offers the seller freedom to do with the proceeds as they choose, whereas a bank loan pulling equity would impose covenants on the borrower that restrict what they could do with the funds.

In effect a sale leaseback just another kind of financing. (I’m an LP and this was the best way to describe it in my opinion).

@Taylor L. I have a decent size position in a MHP currently and am satisfied so far, especially due to the leverage restriction limit of the fund set at 50%.

The deals I have seen do behave bond-like for cash flow but not upon exit. Due to the automatic annual increases set upon in the long term lease upon purchase there is built in forced appreciation, and the profit split for the exit is similar to a waterfall hurdle for multifamily or MHP deal. The single tenant aspect of it is certainly where the lions share of the risk lies, so it is imperative that the sponsors have a solid track record of credit risk management of the asset both on a unit level and company level. I do have concerns with how red hot the multifamily syndication market has become so I am vetting other options for capital deployment. I think you can appreciate that.

To add another note. A significant factor into why I am looking at other investment syndication options is the multifamily space as a whole is getting long in the tooth, especially in B/C apartments. You can see it in the way sponsors are expanding further afield to find deals in secondary and tertiary markets and the prices paid. Many of the sponsors I am invested with have mentioned this as an issue, who are getting outbid to a level where the financial viability of the deal comes into question.

I still love the multifamily space as an LP but I want to expand my options.

I've been invested in an array of multifamily and MHP private syndications as an LP for 2 years now, a convenient way to invest in real estate passively while I work overseas, leveraging the experience of a reputable sponsor/s. But I am now looking into single tenant sale and leaseback syndication NNN deals as an LP. I like the upside of regular cash flow, substantially lower expenses for upkeep/maintenance/property taxes, and long term triple net leases.

I realize the downside is you are at risk of a single tenant, but am intrigued by the opportunity to balance where my syndication capital is going. I am balanced about 50/50 between Wall Street products and private RE syndicated deals as an LP.

What have your experiences been so far in NNN sale and leaseback deals? Industrial/retail/office, any comments would be appreciated for insight.