240. The Top 5 Things Limited Partners Should Know Before Investing in Syndications & Funds
Sep 26, 2023
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Guest: Kaylyn Deaver, Partnership Tax Expert. They explore the topics of depreciation, LLC investments, taxable distributions, deducting losses, and 1031 exchanges in real estate syndications and funds. If you're a limited partner, this episode provides valuable insights.
Depreciation reduces rental income, resulting in lower individual taxes for limited partners in real estate syndications or funds.
Limited partners have the option to invest personally or through various structures, such as an LLC or retirement account, with no change in tax benefits.
Distributions from partnerships are generally not taxable, but understanding the distinction between distributions and allocations on the K-1 is crucial for limited partners.
Limited partners can offset W-2 income with real estate losses if they qualify as real estate professionals or meet specific income thresholds, and unused losses can be carried forward.
Deep dives
Depreciation and its Impact on Personal Taxes
Depreciation is a non-cash expense that reduces rental income on a K-1, resulting in lower individual taxes. When investing in syndications or funds, limited partners receive a small share of the overall depreciation benefits, providing tax advantages even though the share is small. However, determining the exact amount of depreciation received can be challenging, as it is combined with other income on the K-1.
Choosing the Right Investment Structure
Limited partners have the flexibility to invest personally, through an LLC, retirement account, or trust. The choice of structure depends on personal preferences and factors such as diversification, limited liability, and legal protection. Working with an attorney is recommended to evaluate which structure suits individual needs. From a tax perspective, investing through an LLC or retirement account does not change the tax benefits, as all income is still passed through to the partner.
Taxability of Distributions from Partnerships
Distributions from partnerships are generally not taxable, but confusion often arises due to the distinction between distributions and allocations. Distributions are typically not taxable, whereas allocations of income or losses on a K-1 determine taxable amounts. Understanding the left (non-taxable) and right (taxable) sides of the K-1 is essential in identifying taxable information for limited partners.
Ability to Deduct Losses Against W-2 Income
Limited partners cannot usually deduct real estate losses against active W-2 income unless they meet specific criteria. To offset W-2 income with real estate losses, individuals have to qualify as real estate professionals or fall under certain income thresholds. However, unused losses can be carried forward and used to offset future passive income from investments.
1031 Exchanges into Partnerships
Limited partners cannot directly 1031 exchange into a partnership since partnership interests are not considered real property. However, it is possible to utilize a tenant-in-common (TIC) ownership structure, where individuals own a percentage of the property alongside the partnership. This allows for some tax benefits, but the complexity and costs associated with TIC ownership make it more feasible for larger investments.
Tax Smart Passive Investing Course for Limited Partners
Tax Mart offers a course, 'Tax Smart Passive Investing,' specifically designed for limited partners. The course covers topics such as understanding partnership documents, estimating allocations of depreciation, and various tax considerations for limited partners. It aims to educate limited partners on their investment tax implications and equip them with the knowledge to make informed decisions.
Conclusion
This episode of the Tax Mart REI podcast discussed important considerations for limited partners investing in real estate syndications or funds. It covered topics such as depreciation's impact on personal taxes, choosing the right investment structure, the taxability of distributions from partnerships, deductibility of losses against W-2 income, and the ability to 1031 exchange into partnerships. It also introduced a course, 'Tax Smart Passive Investing,' aimed at educating limited partners on tax implications and providing tools for better decision-making.
In this episode, Brandon is joined by Kaylyn Deaver, Partnership Tax Expert, to discuss the five crucial things that limited partners should know before investing in a real estate syndication or fund.
They explore:
- What is depreciation and how does it affect my personal taxes?
- Should I invest in a syndication personally or through an LLC, a retirement account, or a trust?
- Are the distributions I received from the partnership taxable?
- Can I deduct losses against my W-2 income?
- Can I 1031 exchange into a partnership?
If you are a limited partner looking for clarity on syndication and fund tax issues, this is an episode you don’t want to miss.
Enroll in our Tax Strategy Foundation for Limited Partners course:
www.taxsmartinvestors.com/limitedpartners
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To become a client, request an initial consultation from Hall CPA, PLLC at www.therealestatecpa.com/become-client
Follow Brandon on Twitter: @bhallcpa
Follow Thomas on Twitter: @thomascastelli_
The Tax Smart Real Estate Investors podcast is for general information purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Information on the podcast may not constitute the most up-to-date legal or other information. No reader, user, or listener of this podcast should act or refrain from acting on the basis of information on this podcast without first seeking legal and tax advice from counsel in the relevant jurisdiction. Only your individual attorney and tax advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this podcast or any of the links or resources contained or mentioned within the podcast show and show notes do not create a relationship between the reader, user, or listener and podcast hosts, contributors, or guests.
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