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Crowdfunded Real Estate Tax Question

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  • Crowdfunded Real Estate Tax Question

    I'm looking into investing with some crowdfunding real estate.  Specifically CrowdStreet.  They have one investment opportunity that will invest in anywhere from 30-50 properties.  Those properties are not known at this time but could be anywhere in the U.S.  I currently live and work in Texas and work in the ER and have an S-corp (if it even matters).  What tax issues will I run into if I was to invest in the opportunity described and subsequently am getting K-1s from investments in different states?  Do i have to file taxes in each state?  They do have a few opportunities for single property investments in Texas that I am considering instead if that ends up being he better choice from a tax standpoint.

  • #2


    Do i have to file taxes in each state
    Click to expand...


    yes.

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    • #3
      Only if you have enough income sourced to each state that is over the filing threshold.  Most real estate investments throw of losses until the property is sold so you might not need to file until there's a disposition.

      The single property investments in Texas would be much easier to file your taxes on

      The administrative complexity doesn't seem proportionate to the complexity of the investment.  It reminds me of publicly traded partnership K-1s.  They're a real beast to report properly and most of the time the income/loss is immaterial.

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      • #4
        Thanks for the info!

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        • #5
          Sounds like a bear
          https://www.whitecoatinvestor.com/forums/topic/has-anyone-filed-a-multi-state-tax-return-for-an-equity-real-estate-fund/

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          • #6
            Any state that the partnership is operating in (where they have a property) will need to issue a K-1.  Like @DavidGlennCPA said, there will probably be a loss until a sale, so a return won’t have to be filed.  One thing to think about though, and David might be better suited to answer this, is if there is a loss each year, do you need to file a return in that state to carry those losses forward.  That might be prudent if you expect a significant gain at the time of sale.  On the other hand, if you do need to file a return to carry losses forward and the partnership is operating out of 20 to 30 states that would be a very hefty (and most likely expensive) undertaking.

            You may want to consider working with an investment sponsor that is primarily investing in one state.  I tend to find that while a portfolio of assets all over the country seems less risky, working with a sponsor that only deals with a certain area will often allow them access to properties that most don’t hear about… which will also ease your tax filings at the end of the year.

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            • #7
              Any losses will get suspended due to the "passive activity rules" of §469.  This means that you're technically supposed to track your losses as they relate to each property within the fund.  The K-1 should provide a property-by-property breakdown.

              When one property sells, you get to deduct the previously suspended losses related to that property.  This is how you'd track the losses in each state, on a property by property basis and knowing which state each one is in.

              The practical application of this is the need to create multiple K-1 units in your tax software to properly track this.  Or certain professional software will track it.

              There's additional complexity if the fund decides to make a grouping election for each property.  The effect for the investor would be have all the losses suspended until there's income to offset the losses or the investor disposes of the investment.

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              • #8
                This is a great reason to stick to one state. As I posted in another thread, we’re changing our fee structure to add an upcharge for these multi-state partnerships. It is that time-consuming.

                You have to ask yourself what is the expected return over the long term versus the cost/hassle factor while you hold the share. And how likely is it that you will beat long-term returns of the broad (diversified!!!) stock market, i.e. ownership of a basket of companies throughout the world and covering multiple sectors?

                In the end, that’s what you are attempting - not to “diversify” but to “beat” the market. What makes you that one in a thousand? 10k? 100k?
                Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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