Real Estate Syndication Tax Benefits

If you're like most people, you're probably looking for ways to reduce your taxable income and minimize your tax liability. Well, investing in real estate syndication can help you do just that!


The availability of online real estate crowdfunding platforms and lower investment minimums mean that more investors can now access the benefits of real estate syndication. This blog post explores the tax benefits of real estate syndication and how you can take advantage of them. So, whether you're a seasoned investor or just getting started, be sure to read on!


What Is Real Estate Syndication?



Real estate syndication, also known as property syndication, is a partnership between investors who jointly purchase sizable real estate property. This process usually involves a combination of their capital, skills, and resources to acquire and manage a commercial real estate asset.


Property syndication investors can invest in several assets, including land, apartments, parks, etc.


Why Do People Invest in Property Syndication?


Not every real estate investor can put in the effort to search for real estate listings or manage the property long term. That's why investing in syndication is often a good option for many investors.


Who's Involved in a Real Estate Syndication?


There are two key players involved in any property syndication — the syndicator and the passive investor.


The Syndicator


A real estate syndicator is an individual or company responsible for finding, purchasing, and managing a property for a group of investors.


A syndicator executes the investment business plan to deliver substantial returns to passive investors in real estate syndication.


Syndicators are also known as General Partners (GPs), and their job includes the following:


  • Comprehensively investigating the property

  • Creating financial plans

  • Negotiating with property sellers

  • Identifying possible investors

  • Sustaining investor relations

  • Property management


It's evident from their roles that syndicators are the active investors in the syndication.


Passive Real Estate Investors


Passive investors provide a portion of the capital needed to purchase the property. As investors, they own shares of the property.


These investors also receive passive income (investment gains) from the asset monthly or quarterly, depending on prearranged terms.


Also, passive investors often enjoy several tax benefits due to their involvement in the real estate syndicate.


Tax Benefits of Investing in Real Estate Syndication


Investors love real estate syndication because of the tax benefits they tend to enjoy. These benefits can come in tax deductions, deferring income taxes, and reduced tax rates.


Here are some of the tax benefits of investing in real estate syndication:


Depreciation


For many, depreciation is the most significant tax benefit of investing in real estate syndication. It allows for the deduction of the cost of properties that lose value over time.


Suppose residential real estate conditions deteriorate over time, increasing maintenance and repair costs. In addition to the property deterioration, these expenses are factored in your tax calculations and used to write off a portion of your income.


Depreciation creates the opportunity for the investor to pay capital gains tax at lower rates.


Loss on paper is helpful to make depreciation deductions and offset passive gains from other investments. If these losses exceed passive income, an investor can carry them forward to the future when passive income increases.


Taxation Rates of Capital Gains are Lower


Capital gains are the returns from a property sale. Although these profits fall under income, the taxation rates for capital gains are lower than the rates for traditional income.


Also, real estate gains for a year or more are treated as long-term capital gains and are taxed accordingly.


Therefore, the income generated from investing in real estate syndication is tax-efficient and advantageous to passive investors.


Mortgage Interest Deductions


Mortgage interest deduction allows property owners to count interests on a building-related loan against their taxable income, lowering the amount of income taxes they owe.


Neglect of Self-Employment Tax


Property syndication investors can earn income monthly or quarterly, just like regular jobs. Still, there's no requirement for these individuals to pay self-employment taxes.


This benefit allows them to avoid capital gains tax, typically taking a huge chunk of profits.


1031 Exchange


1031 exchange involves swapping an investment asset for another one that allows deference of capital gains taxes. This exchange got its name from Section 1031 of the U.S Internal Revenue Code.


A 1031 exchange allows a property owner to sell the asset and buy a similar one within a specific time frame. This strategy frees more capital for investment due to the capital gains tax deferral.


Carryover Losses to Keep Capital Gains Taxes Low


It's not unusual to have a high depreciation rate and mortgage interests in the first year of syndication, leading to deductions. This problem is easily fixed by carrying over the losses to later years.


Refinancing


Refinancing involves revising an existing credit agreement and replacing the current mortgage with a new loan. The procedures for refinancing are similar to those for a mortgage application. Typically, the lender will have to evaluate your finances to determine eligibility.


After refinancing, there's a new loan repayment time frame. Compiling all the tax benefits and deductions results in a huge gain for investors in real estate syndicates. This allows investors to harvest equity growth without selling the property and paying capital gains tax.

The Legal Structure of Real Estate Syndication

A real estate syndication usually has syndicators as the general partner or manager and the investors as passive members or limited partners. This architecture makes the syndication a limited liability company (LLC) or limited partnership (LP).


The rights and responsibilities of the syndicator and passive investors reflect in the LLC Operating Agreement. This document guides the operations of the LLC.

Benefits of Investing in Real Estate Syndication

It's common knowledge that real estate investments are quite beneficial. Following are some of the benefits that real estate syndicate investors stand to gain.


Access to Huge Investment Opportunities


Instead of single-family rental property, you have the opportunity to invest in a more profitable multifamily apartment building through a syndicate.


Risk Reduction


It's a common but wise strategy to have various assets with little or no relationship. That way, you avoid putting all your eggs in one basket. If one investment performs poorly, it won't affect other assets in your portfolio.


So, an investment in a real estate syndicate maximizes returns and minimizes risks. Also, it's important to note that all investors share risks in a syndicate. However, an investor's risk is generally limited to their investment amount.


Passive Investment


The syndicator does all the work in a syndicate. Their responsibilities involve identifying opportunities, negotiating purchases, managing acquired property, and more.


This arrangement is excellent for a passive investor who puts in little time and effort to keep track of invested capital. The investor gains from his investment monthly or quarterly while letting the syndicator do all the work.


Since property syndications are passive investments, passive investors also enjoy significant tax benefits.


Investment With Professional Management


Having a professional real estate management team is vital in any investment. Investment teams perform onsite tasks like dealing with tenants and initiating necessary preventive maintenance of the investment property.


Investing in commercial real estate syndication puts you in a position to have a professional management team that handles onsite responsibilities efficiently and guarantees you significant passive gains.


A syndicate with a professional management team can balance the maintenance cost of the property with its net income. This balance is necessary because while keeping expenses low is important, you don't want to keep them so low that it negatively affects the asset.


Tax Benefits



Investing in a syndicate offers various tax benefits. For example, since commercial real estate syndications aren't active investments, you get to pay lower tax rates as a passive investor.


Cons of Real Estate Syndication


Like every other venture, real estate syndication has some downsides, including:


Property Syndications Aren’t Liquid


Although syndications offer returns, your investment capital is frozen for a period, depending on negotiated terms. Usually, you get your money back after the sale of the property or upon a cash out refinance.


Since other investors are involved in the deal, the duration of your investment is usually out of your control. So, it's impossible to opt-out, except there's a clause in the agreement that allows someone else to purchase your shares.


Lack of Control Over Operations


The syndicator is responsible for the day-to-day operations, taking them out of the control of the passive investors.


A single investor doesn't handle the operations in a syndicate. That differs from a single property investment where the sole investor makes the decisions.


Eligibility Requirements for Investing in Real Estate Syndication


Investors must meet certain criteria to put money in a syndicate. For eligibility, you must be an accredited investor, and in some cases a syndication can accept “Sophisticated Investors” as well. Most syndicates only accept Accredited investors and this criterion serves as a roadblock for unaccredited investors. Peoples Capital Group accepts both Accredited and Sophisticated Investors.


Investors must meet a certain financial threshold annually to become accredited. Alternatively, a net worth exceeding $1,000,000 guarantees accreditation.


Many real estate syndications are within reach of sophisticated investors. Sophisticated investors have high net worth, investment experience, and capital to partake in advanced investment opportunities.

Conclusion

Several benefits come with real estate syndication. These benefits include passive income, access to huge investment opportunities, risk reduction, and more.


In addition to these benefits, real estate syndicate investors also enjoy certain tax privileges, ranging from tax reductions to avoiding taxes — little wonder why investors jump on any available real estate syndication.





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