All Forum Posts by: Tushar P.

I understand that the suspended losses get released and become “allowed” when the K-1 is marked final. But how do the suspended losses for final K-1 flow into Schedule E line 41 (or line 32): from line 28 column g (passive loss allowed via 8582) or from line 28 column i (non passive loss allowed)?

Does it even matter? Does it depend on whether the CPA selected only “final K-1” or selected both “final K-1” AND “complete disposition” in their software. Wondering which one would be correct or if both are correct…

@Roy Mitle @Michael Plaks 

For an investor with multiple investments in different states, it is very possible for a specific investment to have the unallowed loss as zero in the federal 8582 (i.e. all the losses from prior years already used up to offset gains at the federal level) without having had any gains from that specific investment. Now when the final K1 shows a big gain at federal and state levels for that specific investment, can the gain at the state level be offset by all the prior years losses (corresponding to that specific investment) that were used up to offset the gains at the federal level only?

Conversely, if the federal 8582 shows zero unallowed losses, is the game over for offsetting gains at the state level even when the prior losses were not used to offset the gains at the state level? @Michael Plaks  @Basit Siddiqi  @Ashish Acharya

I’m not sure if this is always correct. NJ state return specifically tracks the loss carry forward.

Also, what do you make of this statement from CO tax booklet “A nonresident of Colorado may source to Colorado passive losses carried over from prior tax years and claimed in arriving at federal adjusted gross income to the extent such nonresident had Colorado source passive losses in prior tax years not previously claimed for Colorado income tax purposes.” - does the last point mean that CO passive losses used in prior years (not just previous year or current year) for offsetting passive income at federal level can be used to offset CO passive income in current year if they were not used for offsetting CO passive income in prior years (because there was no CO passive income in prior years)? If yes, then just tracking previous year’s 8582 is not enough.
@Michael Plaks I think the quote will need to be read a few times haha (who writes these tax codes 🙄)

Neither stock market nor real estate can give me the cash flow that I get from my job. And I don’t have time for either anyways - hence index funds for stock investments and syndications for real estate investments (only with institutional syndicators / family offices). In the second half of 2019 when the stock market was very expensive, I lowered the amount (to 8k/m) being dumped into index funds, and started dumping money into syndications: 10+, including opportunity zones funded by capital gains from stock sale in Q4-2019. But increased to 15k/m around Mar-Apr 2020 when the stocks became cheaper. Last year lowered gradually and stabilized at 10k/m and didn’t invest in real estate either as both stocks and real estate looked expensive. Now ramping up again into stocks. I may be incorrect in thinking that real estate will be a buyer’s market in 12-18 months from now when the fed has stabilized the interest rate increase, but that’s how I’m playing it. When the stock market becomes stabilized/expensive (in 12-18 months, because fed will be done increasing interest rates), I will most likely stabilize at 12.5k/m into index funds and start dumping disproportionately into real estate syndications.

Overall, I don’t have plans to put more than 15% of my total investments in real estate, because I see real estate as a capital preservation strategy rather than capital growth strategy. I may dump more into real estate when I don’t have much time (I still have a few decades to go before retirement). FYI, I see real estate syndications being similar to (junk) bonds, not equities.

What’s your strategy currently and over the next few years?

If you have time on your side (i.e. you are not in your 70s-80s), then stock market is an opportunity. I used to dump 10k/m into index funds, but increased that to 12.5k/m from March onwards. I can keep increasing it every 3 months by 2.5k, up to max of 20k/m, if the stock market keeps falling. Will gradually go back to 10k/m when the market starts going up (maybe by mid-end 2023). At minimum, the money will be 10x in 30 years, with zero effort. Just like the money dumped 13 years ago is 5-6x now, and that dumped 2 years ago is 1.5x now, with absolutely zero effort.

By the time the stock market stabilizes and starts going up, the real estate market would have become buyers market. That will be the time to dump extra incoming cash into real estate.

Both stocks and real estate are investment vehicles for me to dump extra incoming cash. So I look at them simply with regards to asset allocation and diversification. But I understand those who do real estate for living simply don’t have the mindset to invest in stocks.

I would expect getting a good return with leverage (over the entire lifecycle of the investment) to be a more difficult task, simply because of the risks involved. Just like how getting a good return when buying stocks with margin requires a greater expertise and market savviness than buying stocks with cash. 

I personally don’t like debt, so I pay cash for everything. Though I know there is no shortage of people who take loans to even buy phones and laptops (not just cars and houses).
 

How is this possible? Is it because you have zero (or very small) LTV?

Assuming 1% rule for revenue and 50% rule for opex, the annual return will be 6%, assuming no mortgage.

For 80% LTV with good interest rate, the mortgage payments would be around 30-35% of the revenue. Subtract the depreciation of 3% after accounting for the mortgage payments, and you will have a paper loss.

By paying cash (i.e. no mortgage) for the rental property, anyone can get positive cash flow even after accounting for depreciation loss. That will happen even if the investment is very poor. Hope this is not the reason for getting positive cash flow even after accounting for depreciation. Because the cash on cash return will be very low for the risk involved (not to mention trapped equity).

Another way to get positive cash flow (with 80% LTV) even after accounting for depreciation loss is to have very high revenue (much higher than 1% rule) and very low opex (much lower than 50% rule) - this is generally achievable in war zones. Hope this is not the reason for getting positive cash flow even after accounting for depreciation.

Generally a good investment will have a paper loss. In fact it’s the poor investments (bought with cash, war zones) that generate positive cash flow even after accounting for depreciation loss. Poor is a relative term though - for many people dealing with war zone properties is their bread and butter, and for many people buying rentals with no mortgage is better than having cash in the savings account.

Or am I missing something?

So syndications are not set up as REITs but still the distributions gets taxed as they would be in REITs, i.e. at ordinary tax rate? 

Yes, but you will need to keep doing it or you will end up paying more taxes than saved. Or you may save taxes but have greater capital losses. Consider the following:

A. Do you think deal #2 will provide profit, or could it go into losses since you are not investing in it for its quality but only to defer taxes from deal#1?

B. If indeed you get lucky and deal #2 exits with profit, the taxes owed on the 50k from deal #1 will be more than the taxes you would have paid if you didn’t invest in deal #2, since depreciation recapture rate is always higher than the long term capital gains rate.

C. To defer the taxes owed in scenario B above, you can invest in deal #3 in the year deal #2 exits. But you will be back to scenario A. Do you think deal #3 will provide profit, or could it go into losses since you are not investing in it for its quality but only investing in it because you are desperate to not pay more taxes than saved.

Even if you get lucky with deal #3 while not investing in it for its quality, you will face the same situation with deal #4 (when deal #3 exits). Or accept that paying more taxes than saved is less risky than losing bigger capital. So be careful before you adopt this strategy, though many people who may benefit from your investment may tell you that you are so smart to have figured out this strategy yourself 😏. 

Some people could make it work. Maybe you can too. Good luck!

Yeah I see the tax benefits of real estate blown out of proportion for marketing purposes. I’m sure there is no shortage of sucker investors. Uncle Sam is definitely not giving anything for free 😏

As for turnkeys, I think the time/drama is simply not worth it for me (apparently it gets marketed to suckers as “passive” investments). If it had the potential for outsized gains then I may have thought of enduring the pain that comes with it. Not that syndications offer anything extraordinary when it comes to returns. Overall the real estate investments are a diversification and capital preservation strategy for me. So I see it as a low risk low return investment. Though for sucker investors, it is definitely a high risk low return endeavor.