OK, so you're a syndication investor. What does that mean for your tax reporting?
Mostly it has been good news for us as LPs. The tax benefits of investing in syndications have been tremendous. From regular depreciation to bonus depreciation (an advanced topic that we'll get into later) to the ability to defer capital gains through a 1031 exchange, there are many, many ways in which private real estate investing through syndications is tax-favored.
There is one small downside: if you invest in enough syndications you are likely to need to file for an extension on your personal income taxes. Once we were in more than about a dozen syndications, we started to file for annual extensions. It is no big deal but it is a routine part of this type of investing.
Why, you might ask, does this happen? Don't syndicators have to get you your tax materials on time? Well, yes, they certainly are supposed to. The IRS rule is that K-1s are intended to be delivered to you by March 15 of the year in which you have to file. But very often they are late. Here are a few of the messages we've received this year (made anonymous so as not to shame any syndicators, but they are direct quotes)--all sent AFTER the required deadline:
Syndicator #1: "We are currently waiting for our operating partners to provide essential items so our accountant can complete the K1s. We are following up daily and doing everything we can to get them done as soon as possible. We will provide another update near the end of next week with any new timelines if they are not finished by then. We greatly appreciate your patience while we work on this, thank you!"
Syndicator #2: "As a follow up to my previous email, we are working hard to continue to push to get returns back from [CPA firm]. I expect a few returns to be released as early as tomorrow based on their communication, but since we have so many they are working on, we won't know the order until they are actually released to us."
Syndicator #3: "The one area where we’re lagging is in getting our K-1s sent on the properties that you’re invested in. At the end of last year we met with both CPA teams that handle our property tax returns, and I thought we hammered out any deficiencies we had from the previous year. We provided the required information to them timely, and we were told 3/15 dates were not going to be a problem. Obviously, for those still waiting on their K-1s, that 3/15 date was surpassed. We’re hearing from the CPAs that it’s a shortage of workers on their end as the main reason our returns are slow in coming in. It’s frustrating to have thought we had any issues from the prior year fixed to only have K-1s out past our target 3/15 date. We have been in constant contact with the CPAs to keep making sure they have all they need to get these tax returns done as fast as possible. Although our hope is to be able to send these before the 15th, our CPA's have also let us know that if you have not yet received your K1, they would recommend filing for an extension."
We could post more of these examples--and we've received plenty--but it would be boring. You get the point. These messages were all from AFTER the deadline but before the tax filing deadline. The essential message was all the same: you better file an extension because we probably won't get you your K-1s in time. So that's what most people do.
A shout out to one firm that has been 100% on timely K-1s: Cape Sierra Capital.
Another exception: we've had very positive experiences with the big crowdsourcing platforms, such as Fundrise. They've gotten us the materials on time each year. So if you really care about being able to file on or before the ordinary filing deadline, one option could be to focus your investments on the crowdsourcing platforms.