Real estate syndication is a good option to buying and operating a property on your own if you’re thinking about investing in real estate but don’t want the inconvenience.
THE FOLLOWING MAJOR THEMES ARE COVERED IN THIS ARTICLE:
- Real estate syndication: what is it?
- Syndicators: who are they?
- Is real estate syndication the best option for you?
- What tax advantages are there for syndication investors?
WHAT IS SYNDICATION IN REAL ESTATE?
A real estate syndication is, in a nutshell, a group of investors who combine their funds to buy huge, lucrative real estate assets. Apartment complexes and storage facilities are only a couple of the typical kinds of commercial real estate bought through syndication.
A individual investor might not have enough money to buy a complex with 300 to 800 units in its whole, therefore by pooling funds via syndication, each investor can passively engage in high-end real estate ventures.
A crucial advantage that real estate syndication offers to investors is the assistance of an experienced, knowledgeable Operator partner who will guide you through the purchase, oversee the ongoing management of the asset, and then exit typically in 3-5 years once the asset has been renovated and stabilized.
SYNDICATORS: WHO ARE THEY?
General partners or sponsors are other names for real estate syndicators. They are in charge of locating and examining potential investments. When they discover a promising asset, they create an investing strategy with the intention of giving investors favorable returns and continued passive income.
Crowell Capital, one such fund manager, invests actively in the properties they suggest. As a result, they choose the best assets, produce passive income, and accelerate equity returns when the property is sold, all of which are in line with the interests of passive investors. The following are only a few of the hassles that syndicators handle so that busy professionals can avoid being landlords:
- Carrying out meticulous due research on each property
- Creating detailed financial planning
- Negotiating with the property’s sellers
- Assembling a group of prospective buyers for the property
- Property administration
- Cultivating and overseeing investor relations
DOES REAL ESTATE SYNDICATION FIT FOR YOU?
Due to the possible risk and sophisticated nature of the investment, you must be qualified as an accredited investor in order to invest in a real estate syndication. If you fit one of the following descriptions, you are an accredited investor:
- Earned more than $200,000 (or $300,000 with a spouse) in two prior years, and you logically anticipate earning that amount this year OR
- You or you and your spouse have a net worth of more than $1 million (does not include the value of your primary residence)
Passive investment in a real estate syndication is a great fit for investors that meet these requirements and desire to diversify their present portfolio, generate passive income, accumulate wealth, and receive tax advantages.
WHAT ARE THE TAX ADVANTAGES OF REAL ESTATE SYNDICATION?
You may benefit from tax deductions, deferred income taxes, and lower tax rates through real estate syndication.
DECREASED CAPITAL GAINS
When a property is sold, capital gains are realized. Despite the fact that these profits are considered income, capital gains taxes are less expensive than ordinary income taxes.
Real estate gains are taxed at a reduced rate since they are long-term capital gains if the property is owned for more than a year. This improves the tax efficiency of any revenue derived from a real estate syndication for you as a passive investor.
INTEREST DEDUCTION FOR MORTGAGES
If a building-related loan is in effect at the time of your investment in a real estate syndication, you are qualified to write off mortgage interest as the owner of the property. This can be subtracted from your taxable income, which reduces the potential tax liability.
1031 EXCHANGES
By incorporating investment earnings into a new purchase, you can postpone paying capital gains taxes. As a property owner, a 1031 exchange enables you to sell one asset and purchase a different one of a similar type within a certain time period without incurring capital gains taxes. By deferring capital gains until you sell an asset and keep them without rolling them over, you will have more money to invest and invest in other investments.
Depreciation Depreciation is regarded by many real estate syndication investors as one of the most important tax advantages of owning real estate. The cost of the asset can be written off over time through depreciation, even if the market value is rising.
You can use depreciation to minimize your capital gains tax liability and help you balance out any gains from other investments you may have made. You can use the credits at a later time when your passive income rises because they can be carried forward if any losses exceed your passive income.
MAINTAIN LOW CAPITAL GAINS TAXES WITH CARRYOVER LOSSES
In the first year of syndication, deductions of between 80% and 130% are not uncommon due to a high depreciation rate and mortgage interest. Carrying over the losses to other years is a simple solution to this issue.
TAX ADVANTAGES OF SYNDICATION INVESTMENTS
Several elements determine whether an investor in a syndication will receive tax advantages. The entity type, whether you partake in the earnings, the capital, or both, and whether you took an equity or debt position are the most frequent variables affecting your prospective tax advantages.
The majority of syndicates are set up as LLCs. Due to their extraordinary flexibility, LLCs are able to issue a variety of share classes to investors. These various share classes frequently have distinct shares in the capital and profits of the business.
You will earn a pro rata portion of the LLC’s profits and losses if you own shares in the company and have an equity interest. This indicates that a portion of the entity’s tax plan will be assigned to you.
An LLC will give you a Form K-1 when it has claimed all of the income and deductions on its tax return. Your personal tax return will be prepared using that K-1, and it will include information about your part of the entity’s gains and losses.
As a loan holder, you will get interest payments from the company. You won’t benefit from any tax planning techniques used by the entity because you won’t share in its gains or losses.
It’s crucial to remember that, unless the distribution exceeds your basis in the LLC, you usually won’t have to pay taxes on money received from the LLC. Clients will get $50k in dividends, but the Form K-1 they receive displays a passive loss, which is a common source of confusion.
In this case, despite receiving $50k in distributions, the investor would not be required to pay taxes because of the loss stated on the K-1. These distributions, on the other hand, would be regarded as capital returns and reduce the investor’s basis in the corporation.
