All Forum Posts by: Kurt Granroth

Quote from @Michael Plaks:

@Kurt Granroth

Maybe these posts will help:

https://www.biggerpockets.com/...

https://www.biggerpockets.com/...

https://www.biggerpockets.com/...

Thanks, Michael. Your posts are among the best at describing the subtleties of syndication tax benefits (compared to the hyperbole typically touted). My case here is super specific, though, so the truest sentence of the above in play here is: "[t]axes, especially in real estate, are so ridiculously complicated that your mileage will almost always vary". Indeed.

The GP would be of little help, since this is a question of how the IRS would interpret the results and few GPs are tax professionals.

In short, when a property sells, there are multiple lines on the K-1 that can contain the sale amount and the line chosen has a very large impact on where the value goes on the various IRS forms. In this case, the chosen line was apparently unusual enough that TurboTax and a CPA disagreed where the value goes and what it means, but neither could fully justify why. The difference meant that either the sale proceeds were passive gains and could be offset by my accumulated passive losses or they where regular capital gains and couldn't be (and result in $12,000 more in taxes). TurboTax insisted it was the former; CPA the latter.

I'm looking for a tax wonk (CPA or tax pro), of sorts, that can satisfactorily explain a possibly esoteric tax situation to me.

I am an LP on multiple syndications and one such syndication sold in 2021. The K-1 was odd enough to confuse both TurboTax and a CPA. That is, my first round with the taxes was with TurboTax and while it seemed confident about the choices it made, I wasn't satisfied with its explanations. My goal with taxes is that even if I'm not doing them by hand, I still want to understand every choice on each line ("why is that value on that line?"). Since I couldn't get that clarity with TurboTax, I found a CPA with "extensive passive investing experience" through Picnic Tax. His interpretation of how to apply the K-1 was wildly different than TurboTax's... to the tune of some $12,000 more in taxes!

Unfortunately, I didn't get satisfactory answers from him, either. We went back and forth trading IRS publications but in the end, he cut me off saying that it was taking up too much of his time and he considered his services rendered appropriate for the price I paid. Maybe. I did think that if he understood that part of the IRS code better then it wouldn't have taken so long and he would have been able to convince me.

I paid the extra $12,000 (plus interest; got the penalties waived since it was my first time) just to be on the safe side. I'm still not convinced that it was correct, though.

I am willing to pay a CPA or tax professional with extensive experience with syndications in particular (not K-1s in general) to review already-submitted taxes (at least the specific part in contention) and prove to me what the right strategy is, backed up with the unambiguous lines from the supporting IRS docs.

If that goes well, then I will want my 2022 taxes finalized, too, but that's secondary to first knowing that there is one correct way to do the 2021 taxes and convincing me of that!

Any recommendations for such a person or firm?

Okay, excellent.  Given that, I can say that my passive income in the example is $40,000 ($5,000 from 9c and $35,000 from 11i).

Say I also have passive losses from other investments that are a mix of carryover and current. Can I use the entire $40,000 in Form 8582 Part V (a) when calculating the overall passive gain or loss or is there a difference in the type of passive income in this case that means that only one of the sources can have passive losses apply? Put another way, is there a reason why only  the 9c $5,000 may be used in calculating the allowed passive gains/losses on Form 8582?

Let's say I'm an LP on an real estate syndication LLC that sold its sole property last year, although the LLC itself has not yet dissolved (e.g., this does not warrant a "Final K-1"). I am not a Real Estate Professional and my involvement in this is entirely passive.

The K-1 in this example shows an "Unrecaptured section 1250 gain" on line 9c of $5,000 and subsequently the same for line 10 "Net section 1231 gain". By all accounts, this is passive income according to bothTurboTax and my CPA.

Next up is the "Other income" in line 11i (roughly the proceeds from the sale) of $35,000. There is a note stressing that this is "fully attributable to the sale of business assets" and as a result "is non-portfolio long-term capital gain". In this specific case, is the 11i income of $35,000 passive or not?

This is an example, but it's based on a real K-1. If I enter all this info into TurboTax, then it insists that the 11i income is passive. My CPA disagrees.

The classification of this matters quite a bit since if it's passive, then I can apply my extensive passive losses from other investments to defray it. If it is not, then I pay an addition $12k in taxes.

Let me know if this is not knowable with the info I provided.

Quote from @Jacob Rosenkranz:

I am currently setting aside cash in a savings account, with the rest of the required capital likely coming in the form of a margin loan from my taxable brokerage account so that I don't have to sell the stocks. What are you currently doing? I see this was posted several years ago. 

I've ended up mostly just keeping the "pending" cash in a saving account. My original question was hinged on the idea that the money would be sitting for a good amount of time and thus not earning on it would be noticeable... but as it's turned out, I have a big enough pipeline of potential deals that the cash isn't sitting for long enough to make an appreciable difference. And I realize that I like the flexibility of having purely liquid cash. That definitely helped when I invested in one deal the last week of 2021 -- if it was in stocks, there would have been no way of funding the account until after the new year and I would have missed out on 2021's passive losses.

Quote from @Evan Polaski:

@Kurt GranrothSecondly, the hold period.  Your latest deal sounds like it did really well financially.  BUT, now what...  You have reinvestment risk in, as Paul calls it, a speculative market.  And with current inflation, every day you sit around trying to find the next deal is money out of pocket.  

An analysis I would like to see is from capital placed and earning vs capital placed and earning. Take your recent deal that exited, and you have those returns.  Continue tracking how your stock market investment would perform all the way through when you can start receiving proceeds on your next deal.  Point being, if the market keeps climbing, versus you having to sit on that cash for the next 12 months searching for the next deal, earning 0% interest, what does that do to your overall return.  Of course, this assumes your money is sitting in checking or savings to be available when the next deal comes around.

Ah, that is an interesting analysis to make. Of the three exits I've experienced, two have been 1031s and one was a shift into a fund from the same GP (couldn't 1031 it) so all three were transferred from "returned" to "replaced" as quick as could be expected. I do also have a pretty steady pipeline already (and one that is growing) of potential new deals so I'm not sure what the maximum my cash would be sitting might be. Maybe 3-4 months?

I had the third sale in my portfolio and if I characterize the first sale as a solid but uninspiring single and the second sale as a walk, then this one is an out-of-the-park home run!! Considering that I originally thought that my next sale would be the one with such low expectations that even breaking even would be a win at this point and getting this instead is a trip!

Following the format of my previous posts on the sales...

The syndication pitch was like so:

Projections
Hold: 5 years
Total ROI: 95%
Annual ROI: 19%
Multiple: 1.95x
Projected Profit on a $50k investment: $48k

The property didn't make it even close to the full 5 years but sold after only 14 months!! Matching the predictions to such a small time-frame is a curious task, but let's do it anyway:

Adjusted Predictions
Hold: 14 months
Total ROI: 22%
Annual ROI: 19%
Multiple: 1.22x
Projected Profit on a $50k investment: $11k

Here's how it actually performed:

Real Results
Hold: 14 months
Total ROI: 80%
Annual ROI: 69%
Multiple: 1.80x
Actual Profit on a $50k investment: $38k

It crushed the projections! The annual return doesn't look like a real number and even the total return is within spitting distance of the 5-year projected return but after only a little more than a year! Wow!

As before, let's compare this to a "what if" I had invested this into VTSAX instead.

VTSAX
Total ROI: 9.8%
Annual ROI: 8.4%
Multiple: 1.10x
Profit on $50k investment: $4.9k

The very short time frame plus the abysmal year stocks are having this year (which makes an outsized impact on the performance since the time frame is so small) and the stock market had no chance this time around. If it was fair to compare when the stock market was flying high, though, then it's far to compare when it's... not.

I will freely admit that my FOMO instincts kick in with returns like this and I think "I should have invested $400k into this instead of $50k and then my return would have been $320k instead of 'just' $38k!!" and better believe that a part of me is pushing to invest a notably higher amount with this sponsor in their next deal. But... no. This is just not my style. Even in infinite alternate universes, there are very few to none where I would have invested more than $50k with this particular sponsor and I'm even at least a little hesitant to 1031 this with them since that just continues the high risk train.

And that's the key. I am a moderately conservative investor who tries to focus on deals that have contingency plans in place if everything goes catastrophically south -- that is, maybe I won't make any money but I definitely don't ever want to lose money. This particular sponsor is shooting for the moon with every deal and they are phenomenally successful (this deal is par for the course for them) because the market they are in is currently completely insane -- it's not possible to not be successful in this market now. It's exhilarating riding this current wave and I do plan on continuing it for at least one more round, but I very much don't want to be on this same ride when it does inevitably start crashing down!

Let's say I was an LP on an apartment complex that sold this year and while answering TurboTax's questionnaire, it asks for two very fundamental bits of information - the Adjusted Basis and Final Sale Price.  As basic as those are, I'm not 100% certain I know how to decode that info from my K-1.

My K-1 the year of the sale has the following (fictitious-but-plausible) values:

Line 2 (Net Rental Loss): -$3,000
Line 9a (Net LTGC): $40,000
Line 10 (Net Sec 1231 Gain): $6,000
Line 19-A (Distributions): $75,000

Section L:
Beginning capital account: $41,500
Current year net income: $43,000
Withdrawals & distributions: $75,000
Ending capital account: $9,500

In this example, my "Adjusted Basis" was the same as my "Beginning capital account" ($41,500) at the beginning of the year, as far as I know from from this, but can I decipher the Adjusted Basis at the time of the sale?

And what about the Sale Price? The 19-A Distribution line for this year includes the return of my capital + distributions prior to sale + "preferred rate catch-up" + profit waterfall... but it's not clear to me that that's (my portion of) the actual Sale Price, if only because none of the other values add up to it precisely.

For background, here's the relevant bits of my K-1s in this example for the previous years:

Initial Capital: $50,000

Year 1 Line 2: -$400
Year 1 19-A: $600

Year 2 Line 2: -$2,000
Year 2 Line 19-A: $1,500

Year 3 Line 2: -$2,500
Year 3 Line 19-A: $1,500

Subtracting the depreciation loss (Line 2) and distributions (Line 19-A) from my initial capital each year does result in the $41,500 at the beginning of the sale year, so that does make sense to me that that's the Adjusted Basis at that point.

So yeah, given all that, can I extract the Sales Price and Adjusted Basis at the time of the sale from the K-1s I have on hand or do I need to reach into supplementary materials?

Originally posted by @Account Closed:

What you are missing is that if your return and preservation assumptions were dependable, none of the rest of us would waste our time/ effort with much else. 

Hey David. I'm not sure what you mean by "[my] return and preservation assumptions were dependable"?