How to Realize Tax Benefits When Investing in a Real Estate Syndication
If you’re considering investing in real estate but don’t want the hassle of purchasing and managing a property yourself, you should consider real estate syndication as an effective alternative.
This article explores the following key points:
- What is real estate syndication?
- Who are syndicators?
- Is real estate syndication right for you?
- What are the tax benefits associated with real estate syndication?
Let’s examine each in more detail.
What Is Real Estate Syndication?
In a nutshell, a real estate syndication is a group of investors who pool their money together in order to purchase sizable, lucrative real estate assets. Some common types of commercial real estate purchased through syndication include apartment buildings and storage facilities.
A typical investor may not have the funds to purchase an entire 300 to 800-unit complex, so pooling funds together in syndication gives each investor the ability to passively invest in exclusive real estate investments.
An experienced, knowledgeable Operator partner will help you navigate through the purchase, oversee the ongoing management of the property, then exit typically in 3-5 years once the asset is renovated and stabilized is a critical difference that real estate syndication offers to investors.
Schedule a call to discuss real estate syndication more in-depth with Wealthy Mind Investments.
Who Are Syndicators?
Real estate syndicators are also known as “General Partners” or “Sponsors.” They are responsible for identifying and vetting potential investments. When they locate a potential asset, they develop an investment plan that is aimed at delivering positive returns and ongoing passive income for investors.
Fund Managers like Wealthy Mind Investments are also active investors in the properties they recommend. This aligns their interests with passive investors, so they select the best possible assets, generate passive income, and accelerate equity returns when the property is sold. To allow busy professionals to avoid the headaches of being a landlord, syndicators take care of things such as:
- Conducting thorough due diligence of each property
- Developing comprehensive financial plans
- Negotiating with the sellers of the property
- Creating a pool of potential investors for the property
- Property management
- Fostering and managing investor relations
Is Real Estate Syndication Right for You?
In order to invest in a real estate syndication, you must be qualified as an accredited investor due to the potential risk and sophisticated nature of the investment. You are an accredited investor when you meet one of the criteria below:
- Earned income that exceeds $200,000 (or $300,000 with a spouse) in two prior years, and you reasonably expect to make the same income for the current year
OR - Your net worth is over $1 million, either alone or together with a spouse (does not include the value of your primary residence)
Investors who meet these criteria and want to diversify their current portfolio better, earn passive income, build wealth, and get tax benefits are an excellent fit for passive investment in a real estate syndication.
What Are Some Tax Benefits Associated With Real Estate Syndication?
Real estate syndication can assist you with tax deductions, deferred income taxes, and reduced tax rates.
Lower capital gains
Capital gains occur when there is a sale of a property. While these profits are income, the tax rates for capital gains are lower than tax rates for traditional income.
Assuming the property is held for over a year, the real estate gains are considered long-term capital gains, so they are taxed at a lower rate. This makes any income generated from a real estate syndication more tax-efficient for you as a passive investor.
Mortgage Interest Deduction
When you invest with a real estate syndication, you are allowed, as a property owner, to deduct mortgage interest if there is a building-related loan in place. You can deduct this against your taxable income, which then lowers the amount of income taxes you may owe.
1031 Exchanges
You can defer capital gains taxes by rolling investment gains into a new purchase. As a property owner, a 1031 exchange allows you to sell one asset and buy a like-kind property within a specific time frame without paying any capital gains. This means you have more money to invest and defer capital gains until you sell an asset and keep the gains without rolling it over.
Depreciation
Many real estate syndication investors consider depreciation to be one of the most significant tax benefits of owning real estate. Depreciation allows you to deduct the cost of the property over time, even if the market value is actually increasing.
Depreciation can also be used to pay lower capital gains as well as help you offset any gains from other investments you have. They can also be carried forward when any losses exceed your passive income, so you can apply the credits when your passive income increases at another point in time.
Carryover Losses to Keep Capital Gains Taxes Low
It’s not unusual to have a high depreciation rate and mortgage interest in the first year of syndication, leading to deductions of 80 to 130% in year one. This problem is easily fixed by carrying over the losses to later years.
Tax Benefits When Investing in a Syndication
Receiving tax benefits when investing in a syndication depends on multiple factors. The most common factors influencing your potential tax benefits are entity type, whether you share in the profits, the capital, or both, and whether you took an equity or debt stake.
Most syndicates are structured as LLCs. LLCs are extremely flexible entities and can have multiple classes of shares that investors own. These different share classes often carry different stakes in the entity’s profits and capital.
When you are an equity holder in an LLC, and you have an equity interest, you will receive a pro-rata share of the entity’s profits and losses. This means you will be allocated a portion of whatever tax strategy the entity is utilizing.
When an LLC files its tax return, it will claim all of the income and deductions and then issue you a Form K-1. That K-1 will be used to prepare your personal tax return and report your share of the entity‘s profits and losses.
When you are a debt holder, you will receive interest income from the entity. You will not share in the entity’s profits and losses, meaning that you will not benefit from any tax strategies the entity deploys.
It’s important to note that you will generally not pay taxes on funds distributed by the LLC unless that distribution exceeds your basis in the LLC. This is a common point of confusion as clients will receive $50k in distributions, but the Form K-1 they receive shows a passive loss.
In this example, the investor would not pay taxes due to the loss reported on the K-1 even though they received $50k in distributions. Instead, these distributions would lower the investor’s basis in the entity and be considered a return of capital.
The Next Step
At Wealthy Mind Investments, we are proud to provide passive real estate investment opportunities to help you build generational wealth for your family while maximizing your tax benefits.
To start investing in exclusive real estate assets through syndication, you can join our Investor Club or schedule a meeting with Alex or Ashish today.
Ready To Stop Trading Your Time For Money? Contact Us To Begin Earning Impactful Passive Income.
Disclaimer: No Offer of Securities—Disclosure of Interests. Under no circumstances should any material at this site be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of the Confidential Private Offering Memorandum relating to the particular investment. Access to information about the investments is limited to investors who either qualify as accredited investors within the meaning of the Securities Act of 1933, as amended, or those investors who generally are sophisticated in financial matters, such that they are capable of evaluating the merits and risks of prospective investments.
More about the author: Alex Kholodenko
Alex is a Managing Partner at Wealthy Mind Investments.
