Originally posted by @Greg O'Brien:
@Ben Leybovich of course. We would recommend timing this pass through loss up with another exit as well if the investor has several investments
This is a challenging conversation because investors are not terribly educated in taxes, losses, 1031s, etc. I'll give you an example, and this is from a standpoint of a sponsor.
10 months ago we bought a property. This was a smaller purchase at $16M. The income at the time was around $80,000 per month. Within the next 3 months, the income will be pushing $145,000 per month. The property is now worth almost twice what we paid. Clearly, I am compelled to sell, but this means the investors will have to recapture all of the depreciation we gave them just a few months ago. So what's the point...?
I firmly believe it's a mistake to chase 2 objectives. I have never done 1031 for this reason, though investors have asked. I simply feel I can't win. If I promise a 1031, I may be forced to take a deal I really shouldn't just so I can preserve the 1031, and investors wil be mad later. And, on the other hand, if I stay true to finding the best deal, I may need to pull out of the 1031, angering investors now. Either way, the chances of people being mad now or later are high...
Passive losses are the icing on the cake, nothing more and nothing less. The singular objective for investors should be the validity of the merits of the deal. If the deal is right, you'll make so much money that you should be able to pay some tax and not feel too bad about it. Otherwise, chosing 2 birds can often become a bigger issue.