Real Estate Limited Partnerships - Immediate and Future Tax Benefits

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Immediate and Future Tax Benefits Explained

In my previous article, we explored the advantages of real estate syndications, such as limited liability, professional management, and substantial tax benefits. Thank you for your valuable feedback and the many questions about how everyday investors can leverage real estate syndications. The appeal of investing in real estate without the operational responsibilities clearly resonated with many of you.

Today, we'll dive deeper into the tax advantages, specifically addressing how limited partners ("LPs") can benefit from increased depreciation through cost segregation and bonus depreciation, including specific examples -- topics frequently requested in your feedback.

Let’s consider a scenario where a limited partner invests $100,000 in a real estate syndication, and a cost segregation study allows an additional $35,000 of extra depreciation with bonus depreciation in 2024. Assuming the LP is in the highest tax bracket and their K-1 (the tax document that reports a partner's share of income, deductions, and credits from a partnership or LLC) shows a loss of $35,000, we'll analyze how much they could save in taxes if they have passive income to offset and how they can roll the loss forward if they don’t have passive income in 2024.

Understanding Depreciation and Passive Income

Depreciation is a non-cash deduction that allows real estate investors to write off the cost of their investment property over time. With a cost segregation study, certain components of a property can be depreciated over shorter periods, accelerating the depreciation benefits.

Passive income is income generated from investments such as rental properties or other businesses in which the investor is not actively involved. Losses from passive activities can typically only offset other passive income, not active income (e.g., salary or wages) or portfolio income (e.g. interest or dividends,)

Scenario Analysis - #1 - With Passive Income to Offset

• Investment: $100,000

• Additional Depreciation via Cost Segregation: $35,000

• K-1 Loss: $35,000

• Tax Bracket: 37% (highest tax bracket)

If the LP has a $35,000 loss from the K-1 after interest and depreciation deductions, an investor can offset their other passive income dollar-for-dollar. Here’s the tax saving calculation:

Tax Savings = K-1 Loss × Tax Rate

Tax Savings = $35,000 × $37% = $12,950

Thus, the LP would save $12,950 in taxes for 2024.

Scenario Analysis - #2 - Without Passive Income to Offset

If the LP does not have passive income in 2024, the $35,000 loss cannot offset active income. Instead, the loss is carried forward to future years until it can offset passive income or gain from the sale of the property.

• Carryforward Mechanism: The $35,000 loss is stored and can be used to offset future passive income or gain from the sale of the investment.

For example, if in 2025 the LP has $40,000 of passive income or a gain, the carried forward loss can offset this:

Remaining Loss After Offset = $35,000 (carried forward) - $35,000 (offset)

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