Real Estate Syndication Tax [TAXATION of Limited Partnership Distributions]

Real Estate Syndication Tax  [TAXATION of Limited Partnership Distributions]


(bright music) – [Toby Mathis] How are distributions
from a Limited Partnership position in an apartment
syndication taxed? I love these that seem
like they’re really simple, and then I’ve actually, I did the dance with somebody on this not so long ago. What they did is they had
a year limited partner, which means you’re not participating
and you’re not at risk. What happens in a lot of
apartment syndications, they say, you put in 100,00 and
we’re going to give you back not just your 100,000 within a
year, we’re going to give you that plus a bunch of money, and we’re not going to have any income. Yeah, figure that one out. What they do is they go
fix up the apartment, they re-fi it, and then they distribute a bunch of that cash. If you’ve done that, you always get your money back tax free. So the way it works is,
I have a capital account. So if I put money into a syndication, I can always get that money back tax free. If I get a loss, then I’m limited, because I’m a limited
partner, unless I’m at risk. So I can’t use a lot of that loss. If I have income, it doesn’t matter what I have going on, I have
to pay tax on that income if it’s issuing me a
K-1 with income on it. If it gives me back
more cash than I put in, and I don’t have basis, I don’t have risk, then I have to call that
long term capital gains. This is what’s bizarre, so again, so what a typical situation is, promoter of apartment says hey, we were going to fix this apartment up and we need 500,000 from
the investment pool. We have financing on the rest, and we’re going to get
a whole bunch of cash out of this thing right after we fix it. It’s the buy, rehab, rent,
re-fi model, the BRRR Model. And then you take the money
and you go do it again. Well, the way they take the money out is they issue it to the owners. And if you put in 100
and you got back 150, you’re going to pay tax on that 50 even if there’s no income from it, even if the depreciation is keeping there from being any reportable income. So, that’s how it is. So it’s something that looks so easy. From an accounting standpoint, could be an absolute kick in the shins. – [Jeff] But you get
an extra 50 out of it. – [Toby] Yeah, it’s
like hey, can’t be mad. Let’s see, if you pay
all estimated taxes due before the year-end, fine-tuned
for the year’s earning, will there be a penalty if you did not pay quarterly estimated taxes? So you pay all of your taxes
before the end of the year, but you didn’t pay your quarterlies. You’re still going to have underpayment. – [Jeff] Yeah, you’re
going to have what’s called the estimated tax penalty. Because IRS wants you to
pay this money in quarterly. Now there are a few
ways to get around this. Say you made your estimate
December 31st, or December 15th. But you earned all your money, you made a huge profit in December. What we can do is actually
annualize your estimated taxes. That is, saying that most
of your income was earned during a specific period,
so the tax was due during that period instead
of back early in the year. So that’s one way to kind of alleviate the estimated tax penalties. – [Toby] This is why
you hire an accountant. (chuckling) That is funny. Hey, we have one that’s
still related to that LP. Somebody received a K-1,
and this is interesting. It has to do with the 199A deduction, and they just had a note
on their K-1 that said, this property is under
triple net lease agreement and does not meet the
definition of qualified trade or business under
IRC reg .199A(b)(14). Does that mean I don’t
get the 20% QBI deduction, or something else? No, it means exactly that. It doesn’t qualify as
qualified business income, and that’s the only type of
rental activity that does not is triple net leases
and commercial property. So, if you get that through your LP, then you’re not going to
get that 20% deduction. Otherwise, you possibly
can, so it’s kind of weird. In an LP I guess it’s completely passive and you still get it. – [Jeff] Because it has
that real estate factor. (bright music)

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