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Tax Benefits- Passive Real Estate Vs. Active Real Estate

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  • Tax Benefits- Passive Real Estate Vs. Active Real Estate

    I have been hearing a lot about passive real estate options- funds/syndications which can be very appealing to physicians who do not have the time/energy to be actively managing a property on their own (don't want the headache). It seems like funds/syndications are the way to go!

    I have yet to hear about how the tax benefits differ between the two options. Do you receive the depreciation at the same rate for both? Are there tax benefits you only get with one and not the other?

    I assume there is no mortagage, appreciation, or monthly cash flow from a syndication/funds. How does the 8-10% yearly income from passive properties compare with active management?

    Thank you all!

  • #2
    When you invest in a syndication the income receives some of the tax benefits as all real estate investing such as depreciation. You will get a K-1 from the accountant that details any losses due to those deductions but as a passive investor those losses can only offset other passive income. As an active real estate investor the losses offset any income generated.

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    • #3
      Depreciation is similar, but very little opportunity for 1031 exchange, which is how that depreciation is most advantageous.

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      • #4
        dennis Does that mean the first few years profits are shielded by taxes since there should be losses in the syndications for the first years due to depreciation?

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        • #5
          Yes. Generally the K-1 will show little income or actual losses that offset other passive income and up to $3,000 of regular income.

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          • #6
            I love the tax advantages we're able to provide our investors. Cost seg studies aren't cheap, but they provide great value in terms of forced/bonus depreciation, and typically result in paper losses on tax docs. Those monthly distributions will likely be tax free!
            Real Estate Investment Advisor
            FixedIncomeMd.com

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            • #7
              I am wondering how a high income professional with essentially all W2 income best uses the paper losses that come on a syndication K1 form. What income can this offset? I have seen people discussing "pairing equities and debts" as a suggestion for maximizing this. Could anyone share a few examples of what sort of debt investments would be used for this purpose?

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              • #8
                Originally posted by venacontracta View Post
                I am wondering how a high income professional with essentially all W2 income best uses the paper losses that come on a syndication K1 form. What income can this offset? I have seen people discussing "pairing equities and debts" as a suggestion for maximizing this. Could anyone share a few examples of what sort of debt investments would be used for this purpose?
                Passive income through a syndication would do nothing to impact w2 income. If you had capital gains taxes you could invest in opportunity zones which provide great capital gains tax benefits.

                If you were strictly looking at w2 tax reduction then land conservation easements might be an option. Though there's no return on this, it's strictly a tax play.

                Real Estate Investment Advisor
                FixedIncomeMd.com
                Real Estate Investment Advisor
                FixedIncomeMd.com

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                • #9
                  If you have other passive K1 income (surgery center etc) those gains can be offset by your passive real estate losses.

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                  • #10
                    Originally posted by venacontracta View Post
                    I am wondering how a high income professional with essentially all W2 income best uses the paper losses that come on a syndication K1 form. What income can this offset? I have seen people discussing "pairing equities and debts" as a suggestion for maximizing this. Could anyone share a few examples of what sort of debt investments would be used for this purpose?
                    Even if passive losses exceed your passive income, those net losses get carried over to the next year. Many syndication heavily front load depreciation into year 1, but these excess losses continue to carry over until it has been offset by the passive gains, or the investment property sells and there is recapture of those losses.

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