Has anyone filed a multi-state tax return for an equity real estate fund?

[Live Free MD]

More specifically, I am wondering if anyone has prepared their own multi-state tax return for an equity (not debt) real estate fund without the help of an accountant.

Is it relatively straightforward to complete through TurboTax?  If so, how much time and cost did it require?

Alternatively, if this is something that would require an accountant, does anyone have any suggestions for how to find a good accountant who might be familiar with these types of returns?

Thank you!

[The White Coat Investor]

Yes, you just put the K-1s in. No biggie.

[DCdoc]

It was absolutely horrific.  The fund generated income in about 12-15 states.  Federal was easy (just plug in K1) but state taxes were a total mess.  I had to worry about separate state tax filing in each of those states.  Depreciation limited the amount of tax actually owed, but as the investment moves through it's cycle, higher returns will likely compound the problem.  I see @WCI above found it easy.  Maybe I'm doing something wrong?  I've always done turbotax before, but it didn't even let me do that number online (I think the limit was 5?).  If I had known now how complicated it would be, I wouldn't have invested in a multi-state RE syndication and would have instead gone with a company that only invests in a smaller number (ideally texas or another no-tax state) of locations.  I only earned a couple hundred bucks and literally spent over 10 hours just working on non resident state taxes forms.  I could pay for a CPA but that would have more than negated the RE income I earned.  If I could rewind time, I wouldn’t invest in a multi state syndication again.  Now I’m basically stuck for 5-7 years.

[Live Free MD]

Those are quite different responses.  White Coat Investor, did you prepare the non resident state returns as well?

[The White Coat Investor]

Yes, but I agree that it is best to invest in your own state, tax-free states, and states where the fund files a composite return. Early on, you may not have sufficient income from the fund to be required to file in some states either.

[jfoxcpacfp]

My experience leans toward DCdoc's Just reviewed a return for a client whose LP liquidated last year. double-digit state returns, we'll have > 10 hours in prep, not to mention review, processing, etc. Absolutely ugly. K1s have many weird codes that individually can take time to figure out - then each state has their own set or reporting requirements. Then, you have to reconcile the basis in each investment to the entries on the K1 in order to appropriately track (I doubt many CPA firms bother to do this, though).

If you have a K1 from your own practice or a surgery center, it's going to be pretty simple. Investments such as you're talking about are not for the impatient or faint of heart. Nor does every CPA in the firm have the experience to handle, so it takes commitment, at least for us, from a CPA who's been doing them for awhile. We've decided we're going to institute an upcharge for clients who have have an affinity for these investments as they have the potential to be a nightmare.

[Live Free MD]

jfoxcpacfp wrote:

My experience leans toward DCdoc‘s Just reviewed a return for a client whose LP liquidated last year. double-digit state returns, we’ll have > 10 hours in prep, not to mention review, processing, etc. Absolutely ugly. K1s have many weird codes that individually can take time to figure out – then each state has their own set or reporting requirements. Then, you have to reconcile the basis in each investment to the entries on the K1 in order to appropriately track (I doubt many CPA firms bother to do this, though).

If you have a K1 from your own practice or a surgery center, it’s going to be pretty simple. Investments such as you’re talking about are not for the impatient or faint of heart. Nor does every CPA in the firm have the experience to handle, so it takes commitment, at least for us, from a CPA who’s been doing them for awhile. We’ve decided we’re going to institute an upcharge for clients who have have an affinity for these investments as they have the potential to be a nightmare.

Click to expand...

This makes we want to forget about real estate funds and just buy some more VTSAX.  I considered REITs, but I'm not confident that these provide any significant diversification benefit.

[DavidGlennCPA]

Multi-state K-1s can get really tricky, really fast.  There's non-resident withholding, composite tax, filing thresholds, state non-conformity, and much more to watch out for.

It's easy to miss the line on the state K-1 showing your withholding credit or that it's actually a composite return.  Those state income taxes paid on your behalf can be a deduction on Sch A and the composite tax paid can give you a credit on your state return.

Most real estate investments don't throw off a lot of taxable income until there's a disposition of the property so this could mean several years of not filing in a state then filing when a property is sold in that state.

It's even more fun to prepare tiered partnership returns with multiple states.

[highlander]

I've participated in several RE limited partnerships and prepared the taxes myself on Turbotax.  It was a nightmare.  I agree, that in hindsight I would not have participated in a multi-state fund if I'd known the hardship.  The state portion of the tax return was far more difficult than the federal portion (CA and NY were the worst).

In the past 2 years, the fund offered a composite return to cover withholding and tax payment for all the investors that opted in.  This is required by some states, so see if your fund offers it.  The upside is that I don't have to do 6-7 state returns anymore.  The downside is that the composite return is taxed at the highest individual tax rate, which is higher than my own tax rate, and doesn't carry forward losses.  Also, I've had trouble getting Ttax to recognize the taxes I've paid through the composite return to other states, in order to get credit in my home state.

The RE fund investment returns are great, but going forward I think I'm going to look for funds that focus on a single state where I'm comfortable filing.

[mianesmd]

I was hoping to bring back this thread briefly to see if anyone has had more experiences to share regarding multi-state filing and multi-state K-1s? I'm considering several of these multi-state RE funds but this is the biggest roadblock to me proceeding...filing in 6-10 states...is it really that horrible? Sounds like it is.

[The White Coat Investor]

I was hoping to bring back this thread briefly to see if anyone has had more experiences to share regarding multi-state filing and multi-state K-1s? I'm considering several of these multi-state RE funds but this is the biggest roadblock to me proceeding...filing in 6-10 states...is it really that horrible? Sounds like it is.

Yes, it can be bad. It makes it so putting a small amount into these funds doesn't make much sense given the increased tax prep costs.

It's funny to read my 2019 comment. This last year I filed in 9 states and that was the main reason I ended up having a pro do it. Wasn't cheap either. To be fair though, 3 of those states are not for real estate businesses, but it did cause me to file in 5 states I wouldn't have otherwise without those real estate K-1s.

[Lithium]

I filed in California last year, it really sucked. I received losses last year in NC, AZ, and one other state I forget about but didn't bother filing in those states. My taxes are awful but they would have to be pretty hellacious before I forked over the money for a pro.

[PHANTASOS]

Can anyone answer the question, how many state returns and which states for the Origin IncomePlus and DLP housing funds? I think this is the crux of the matter for prospective investors in this space.

[Kamban]

I participate with other partners that hold real estate based business in 4 states. Each year I have to file 4 state returns and one fed return. I just don't have the time to prepare it in TT or face an audit.

I just give it to my accountant of many years who does it and files it. I pay his bill and just chalk it up to the cost of doing business. Trying to save a couple of thosand dollars is not worth it for me.

[MaxPower]

I would also be interested in hearing about peoples’ experiences with Origin Income Plus. I had considered this fund but decided against last year for a couple of reasons, one being the potential complexity of the tax return. Although I have a CPA who does my taxes, I don’t want to pay more for a return than I make from the deal.

But I also bought into one CrowdStreet deal last year and am waiting on my K-1. I heard they do all of the stuff on their end so you only have to file in your home state (plus federal, obviously), but I’m still holding my breath on whether or not this will be true. Stay tuned…