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RE Syndication Is Closing Out

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  • RE Syndication Is Closing Out

    My investment in a RE syndication has just gone round trip. I have other similar investments that are ongoing. Will my gains on this particular deal be offset by the passive losses from this deal, as well as current losses from all the ongoing deals? In my reading, it seems that is the case but I wanted to get insight from others who have experienced this as well. Thanks.

  • #2
    Yep, also want to know. Does it all hinge on how/where you structure your investments (i.e. within an LLC that only comprises passive income)? I think that's what my accountant suggested.


    • #3
      This is always a real bummer time as a syndication/fund owner and a big reason why lots of people prefer direct investing or investing in an evergreen avoid this moment. Yea, it's great getting all that tax-free income for years, but a whole lot of it gets recaptured at the end, doesn't it? Luckily, depreciation capture happens at a slightly lower rate if you're in high brackets.

      As far as how the actual taxes work, I think depreciation recapture is offset by additional depreciation from another investment, but I don't think capital gains are. I'm not sure if capital losses from your mutual funds can offset that or not. You would think so, but I'm not 100% sure. This might be a great topic for a guest post from an accountant specializing in real estate.
      Helping those who wear the white coat get a fair shake on Wall Street since 2011


      • #4
        When real estate is disposed of, here's what happens -
        • Previously suspended losses become fully deductible as an ordinary loss
        • The gain from the sale of property comes in two flavors of capital gains -
          • §1231 gain, which is a long-term capital gain
          • Unrecaptured §1250 gain
        The unrecaptured §1250 gain is not offset by depreciation from another investment, it's simply a type of capital gain whose rate is provided in §1(h). You can net unrecaptured §1250 gains against capital losses just like any capital gain.

        It's helpful to think about real estate in two parts -
        1. Income or loss from operations
        2. Gain or loss from the sale of the property
        The income or loss from operations is passive and gets suspended if it's a loss. This includes annual depreciation expense as well as other operating expenses like interest, property taxes, repairs, etc.

        The gain or loss from the sale of the property is simply the difference between the selling price and the property's adjusted basis. The adjusted basis takes into account the original purchase price and gets reduced for depreciation expense.