An Overview of Passive Activity Rules for Real Estate Investors
PAL 01: An Overview of Passive Activity Rules for Real Estate Investors
January 18, 2022
How to Determine Bonus Depreciation Allocated to Limited Partners Using Operating Agreements
PAL 03: How to Determine Bonus Depreciation Allocated to Limited Partners Using Operating Agreements
February 1, 2022

January 25, 2022
Last Updated : May 23, 2024

PAL 02: How to Estimate Bonus Depreciation on Direct Acquisitions and Syndicate & Fund Investments

In this episode, Brandon and Thomas discuss how to estimate the bonus depreciation you can receive on properties you either acquire directly or with partners or bonus depreciation you may receive by investing in a syndicate or fund.

This episode is sponsored by Landlord Studio and Tax Smart Investors.

Full Transcript:
This podcast has been transcribed using AI, please excuse spelling, grammatical, and other errors.

Thomas Castelli 0:00
You’re now listening to the real estate CPA podcast, your source for all things real estate, accounting

Brandon Hall 0:05
and tax. Here we reveal our secrets that can save you 1000s in taxes, streamline your accounting process and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors and current clients on what strategies they use to grow their business, and how they steer clear of Uncle Sam.

Thomas Castelli 0:29
Hey everyone, thanks for tuning into this episode of The Real Estate CPA Podcast your host Brandon Hall and Thomas Castelli and today we’re going to discuss how to estimate how much bonus depreciation you can receive on properties you either acquired directly or with partners or bonus depreciation you may receive by investing in a syndicate or funds so we’ll stay tuned for that. But before we dive into today’s episode, if you’re doing yourself landlord managing rental properties landlords studios made for you. The software helps landlords simplify income and expense tracking. With their easy to use app, you can digitize receipts record income and expenses in real time and generate reports and even manage leases and tenants plus landlord Studio makes late rental payments and bank visits a problem of the past with secure online rent collection, get the rent paid directly to your bank account. And you can even automate rent reminder emails and late payment fees. Landlord studio is also the best way to stay tax compliant, they offer a range of financial reports including Schedule II and supplier expense reports designed for tax time, you can learn more about landlord studio and start your 14 day free trial at landlord And use the coupon code real estate CPA at checkout to get 25% off your plan. Again, that’s landlord and use the code real estate CPA to get 25% off your plan today.

Brandon Hall 1:51
Now before we really jump into the episode, Tom, I have a very important question for you. Bitcoin is down big. The stock market is down big. Yeah. What are you doing? What are you doing? Cuz I’m following I’m on Team Tom here. All right. Tom has always got great investment advice. Or sorry, this is not investment advice for your financial advisory. Opinion. Yeah, conversation. So

Thomas Castelli 2:14
here, here’s the deal, right. So stock market versus look at the stock market. So here’s my personal experience with this recently, towards the end of last year, October, November, December, I kind of realized the market ran up about 34%. If you look at the s&p 500, and I kind of got FOMO, like oh my god, the markets going up. And I went and put the money that I had earmarked to invest in the stock market into the market out of fear that the market just keep going up and that I would keep losing. But in the back of my mind, I knew that a correction could very well be coming. So I made an emotional decision to do that. In other words, I broke Warren Buffett’s rules. The cardinal rules are be fearful when others are greedy. So everybody was being greedy. They’re trying to squeeze out the last returns, they’re running up the market before the end of the year, I should have been fearful stayed in cash. And then I should be greedy, one of the people are fearful. So everybody’s fearful right now the markets down like 8% this year, so far year to date. And this is when I should have been putting the money in. Now, having said that, this is my experience. So just take that. And just you know, that’s just the emotions that go into the market. Having said that, I did put my money in at close to the top. And the markets now down about 8%. So what am I doing? I’m just sitting on my holdings, because I know that the s&p 500 Historically, it’s always came back 100 It’s always returned higher than before 100% of the time in the history United States. So I know long term that this money will eventually come back and it’ll earn a return. So while I’m a little bummed out, I could have bought in. But 8% below the height high. I bought in a little higher than that. I know in the long run that it’ll be fine. So I’m staying strong that hold on, I’ll probably buy some more. That’s what I’m doing. Are you going

Brandon Hall 4:01
to continue to add to your position? So I know that you can do like the dollar cost averaging strategy, like is that something that you’re gonna, you’re going to be doing.

Thomas Castelli 4:09
So what I did was I front loaded my IRA this year to take advantage of this dip. So I have to pay myself back the way I budgeted my money to pay myself back for front loading that IRA, but I do have some cash that I’m sitting on that I will be putting into the market soon, very soon. Something else that I’m going to be doing too is so I’ve invested in my brokerage account, I have VTi, which is the total stock market index that’s down about seven 8% Based on this data, so I’m using to sell it right, and I’m gonna recognize a capital A short term capital loss because I bought it within less than a year. I’m gonna buy V O which is the s&p 500. Now the s&p 500 and VTi tracks very, very, they’re very, very correlated, very correlated. So what I’m doing is I’m cashing out on a short term capital loss and neatly buying vo o I’m avoiding the wash sale rules. Now a nice little short term capital loss for 2022,

Brandon Hall 5:05
you’ll effectively be in the same position tracking the same effect in the same group of stocks,

Thomas Castelli 5:11
right? Vt VTi vo have slightly different bucket of stocks. But it’s if you look at the way they trend, they’re almost the same thing. So

Brandon Hall 5:20
talk about front loading your IRA, what do you mean? So

Thomas Castelli 5:23
basically, I’m phased out of the traditional IRA limits at this point. So I can’t make deductible traditional IRA contributions, nor can I make a Roth IRA contributions, unfortunately. So I just put the max in 6k, into a traditional IRA immediately converted it to a Roth IRA, which is risky to do at this point, because it’s little uncertainty, but I’m taking the risk. And the reason why I did that is because I would prefer to dollar cost average $500 a month into the market. But because I’m doing a backdoor Roth, it’s easier for me just it’s easy for anybody in this position, you put 6k cash into a traditional IRA immediately converted to a Roth. So you’re not paying any taxes because there’s no earnings, it’s all your principal, and then invest it through your Roth and not invested to your traditional. So I decided to do that. Because I saw the market taking a dip and like, let me take advantage of this dip through the Roth IRA. Probably not the most optimal thing that I could have done, but definitely not the worst. So that’s what I meant by front loading my IRA,

Brandon Hall 6:20
just to be clear, that is conservative backdoor Roth IRA conversion that is in the or was I guess, in the build back better packed as being potentially eliminated or proposed to be eliminated. But that plan is pretty much dead now. I mean, I know that they’re, they’re talking about breaking it up and passing pieces. I think it’s like really focused on the green energy portion of the plan. But yeah, I mean, the entire plan is pretty much dead at this point. So you basically looked at it and said, you know, there’s risk, but I’m willing to accept the risk that, that this, this portion of the plan will not be passed at some point? You know, I’ll do this backdoor.

Thomas Castelli 6:58
Yeah, I did some research on it. And a lot of people think that one or three things are gonna happen, right? Either nothing passes, right, and there’s no issue, so nothing happens and you’re good. The other thing is they could pass it and they can make it retroactive, they can make it starting like the date it passes, right and beyond. So you’d be fine. If you did it before then, or they make it retroactive to January 1 2022. But then they’d have to give someone an hour, they have to give people an hour to like reverse it. And you know, there’ll be some maybe some additional forms you’d have to fill out. But basically, that’s the sentiment right now of the people we’re talking about this, this is what financial planners are thinking right now is how it’s probably going to go. So I’m willing to take that risk. Worst case scenario, the way I look at it is there’ll be some for extra data back to the first of this year, and they’ll give some out for the people who did it. That’s my expectation of the worst case scenario. And why I did it. I think probably if they do pass anything, it’ll probably be effective. That date forward, most likely, but we’ll see. We’ll see. I took a risk we’ll see. All right, so before we go right in Bitcoin, we have to touch on Bitcoin in the crypto markets too. So the crypto markets are down I think today it’s down to as low as $34,000 on on Bitcoin which is a bit down about $34,000 from a tie or more and more I forgot his exact tie. So what I’m doing on Bitcoin is right now if you know the investment thoughts would be if you truly believe in Bitcoin, Bitcoins, long term potential is put money in now because historically low compared to its high, and if it comes back, you know, now would be the time to buy. But unlike the stock market, there’s not enough historical timeline to know that bitcoins 100% going to come back, right. Like I said before, if the s&p 500 Historically, it’s always whenever took a dip whenever it crashed, it always comes back 100% of time, historically speaking, Bitcoin, we don’t have that timeline. You know, the s&p 500 is made up the top 500 companies in the United States. Bitcoin is just one coin, and there’s other Kryptos The point is, right now, if you truly believe in crypto, now’s the time probably to put some money in. But if you’re a little skeptical of it, you might want to be cautious because there’s no guarantee that it’s going to come back we only have 10 years of history with crypto really. And we have 100 and plus years of the US economy and stock market. So that’s kind of my sentiment, you know, if you truly believe in Bitcoin, it’s down. It’s a buying opportunity, as most people would, would say, but you have to understand that there’s no guarantee that it will come back we have a very short time historical timeline of what we know about Bitcoin right now. Yeah.

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Brandon Hall 9:36
I, over the past couple months have gotten bullish on crypto and Bitcoin and all the different projects that you can stake coin in and everything and I mean, just ask anybody on my team, I’m talking about it constantly. But, you know, I put like $2,000 in early December, and now I’ve got I think I’m down 800 bucks now. So I’m down about 100 $1,200 Yeah. Would you mean you know, $2,000 No big deal. But what I did is I started reading the alternative point of view for bitcoins, like the negative the the antagonist, I guess, point of view for Bitcoin. And I started doing some of that research over the past couple days. And because I think it’s important to just balance right, like, it’s important to read why something so great and read all the sources on that. But you have to find balance, you also have to read why it’s bad and wouldn’t what the negative cases for it, and I read an article, it was really interesting. The articles premise was that Bitcoin is worse than a Ponzi scheme, because it acts the same way in the sense that the price only goes up if people buy in. Right, right. Because there’s no underlying business, there’s no underlying value creation, right? It’s a coin, it’s just something to store value. So it only goes up as people buy into it. But just like a Ponzi scheme, does it you can pay out the returns as people continue to buy in. But when people stop buying in, that’s when you start to see the price slide that’s when the Ponzi scheme starts to fall apart. But the difference is that when Bitcoin if sorry, I should say, if not, when I am still pro Bitcoin, by the way, so don’t nobody, I’ve read all the negative stuff, and I’m still pro Bitcoin. So don’t take this negatively. And also don’t take that as investment advice. I’m not a financial planner, and this is just my opinion. But as Bitcoin goes to zero, there’s nobody to sue to recover funds, whereas a Ponzi scheme that goes to zero, you can sue and generally recover funds. And so the article it was really, it was really interesting, the guy at the end, his summary paragraph was like, people that own Bitcoin when it reaches zero, you’re gonna wish it was a Ponzi scheme. And I was like, Whoa, man, that is a heck of a statement.

Thomas Castelli 11:52
Well, you know, the thing about Bitcoin it’s an open network. No one controls Bitcoin at this point. It’s it’s such a wide network, that it’s a peer to peer network. So everybody owns a piece of Bitcoin is part of the network, and there’s no centralized control. So whereas a Ponzi scheme, there usually is someone in control. So that’s a good point,

Brandon Hall 12:09
you know, did you read that article? I didn’t think about that. Sounds like you read that article.

Thomas Castelli 12:14
No, I didn’t, I did. I’m just thinking about what you’re saying. And I’m like the Ponzi scheme, someone’s controlling it, someone’s raising the money, Bitcoin, just an open network. It’s just like something on the marketplace that, you know, to your point, though, the value of it is just derived on supply and demand at this point, at least with the s&p 500, or stocks, or real estate, there’s intrinsic value to those things, right. Like you’re buying a piece of stock, you’re buying an interest in a company that’s generating value, if you buy a piece of apple stock, Apple is generating a lot of money, right? A lot of money every year as they sell their iPhones, their, you know, the iPads, etc. They’re actually a cash running, generating machine. Bitcoin doesn’t have that Bitcoin is just a way to store and transfer value, and its value is only derived from people who believe in it. So

Brandon Hall 12:58
yep, yep. Makes sense. Well, I think we’ve talked enough about things that are speculative and outside of our area of expertise, everything that you just heard was an opinion. So don’t take action, and come back and blame us later. We don’t know what we’re doing either.

Thomas Castelli 13:16
Yeah, it’s for informational purposes only you should consult your own tax legal and financial advisors before entering Tandy transaction. Okay, so if you’re thinking of buying one stock of Apple, go spoke to your financial advisor first just in case like

Brandon Hall 13:29
it’s like a PPM for syndicates. Have you ever read a PPM for syndicates? It’s hilarious because the PPM it’s a private placement memorandum, and the whole point is to educate investors about the deal sponsor. So Tom went and like raise $10 million to buy some big apartment complex, he would need a PPM and the PPM would explain to investors who Tom is and all the risks associated but it’s so funny because like, the ppm is, some of these that I read, it’s like, professional trash talking. Like this guy has no idea what he’s doing, do not invest with him. And then people go and invest them anyway.

Thomas Castelli 14:07
Your investment could go to zero in fact, your investment is likely to go to zero

Brandon Hall 14:13
this guy is going to steal your money do not invest with it. No, we haven’t actually seen PPM like that. But we have seen some VMs that it is kind of funny how they talked about the deal sponsor himself, him or herself, and the risks associated with investing with that one specific individual. But anyway, we’ve been talking too much, man, let’s get to the episode. Thanks for hanging in there. I know that we did something a little bit different today but the stock markets crashed and wanted to talk about it. So so let’s talk about bonus depreciation. Go ahead.

Thomas Castelli 14:42
Alright, so the first thing we’re gonna cover is how to estimate the amount of bonus depreciation you can potentially get on a property you acquire directly so let’s just say you buy a million dollar apartment complex right? Let’s just say you go out you buy a 10 unit somewhere for a million bucks on a you know if you can buy those for a million bucks anymore, but let’s just say somewhere you Now the question a lot of investors may have is, oh, how much bonus depreciation can I get back because sometimes you may have a large capital gain or a lot of passive income that you generate in the current year. And you’re looking for a way to offset that through depreciation for passive losses that are generated by depreciation or primarily generated by appreciation. So you have a million dollar building, how much can you expect. So as a rule of thumb, so this is just a rule of thumb back of the napkin type thing you could use, somewhere between 20% and 30%, of the property’s purchase price is going to be allocated to five and 15 year property, which is tangible personal property, and land improvements. land improvements are things like sidewalks, grass, pools, decks, things of that nature. So let’s just say that, that million bucks, you’re going to get 20%, you could expect a $200,000 depreciation expense two or $300,000 depreciation expense, depending on all the specific details of the property. If you want a more accurate estimate, you’re going to have to get one from the close side company. But if you’re shopping properties, and you just want to know, okay, if I buy this property, how much can I expect, just know 20% of the low end 30% of the high end, I’d probably say 30%, usually pretty high, we don’t see that too often. So you probably want to stick somewhere between 20 to 25%. Just know that that’s the rate and how you estimate how much bonus depreciation you can get from acquiring a property directly.

Brandon Hall 16:22
In real quick on that you do have to take into account your specific geographic location, right, and how land values are fluctuate per state and per location. So for example, if you’re in California, and you’re listening to this right now, your ratio is probably going to be more like 15% of the total purchase price because land values are so high in California. You don’t you don’t cost segue, I know that this isn’t what you meant. And I say the same thing to people too, just in terms of getting a general back of the napkin estimate. But I think some people would take it as Oh, 20 to 30% of the purchase price is what I can cost. Technically, when you buy a property, you have to strip the land value out first. So on that million dollar, you know, 10 unit, maybe $100,000 is allocated to land. So we’re talking about $900,000 building value, and you cost segregate that in you might get 30% on the 900,000. And that would yield $270,000 of bonus depreciation, right. But where did that just fall $270,000 of bonus depreciation on 1 million is 27%. So we’re actually within Tom’s back of the napkin range. That’s why we come up with those back just to simplify it for people, right, just 20 to 30% of the purchase price is probably where you’re going to fall. And we did in that example 27% $270,000. But if I’m in California, right, my land value might be $600,000 on that 10 unit apartment complex. So my building value is only $400,000 30% of that is $120,000 $120,000 is my bonus depreciation. But if you compare that to the total purchase price, now we’re talking 12%. So if you’re in if you’re in a jurisdiction, where the property assessor, like jacks up the land values or land is, is is just so extremely high in price, your cost segregation study like that back the napkins not gonna apply to you should probably estimate the land value, and then do maybe 25 to 30% of the building value to really get a good estimate there. But that’s how you do it’s just an extra step for you. You take your purchase price or your projected purchase price, you go into the property assessor database, you can it’s all public, it’s all online, very easy to find. Think Texas has a couple issues that we always struggle with Texas for some reason. But all these other states, it’s all online, all publicly available, you just go into the property assessor database, you type in your property address that you’re acquiring, and you just look at the land value compared to the total value on the property assessor database, you take that ratio, and you apply it to your purchase price. And that’s the land value on your purchase price that you’re gonna have to strip out for purposes of doing a cost segregation study.

Thomas Castelli 19:08
Right? Right. If you guess if you really wanted to get it a little bit more accurate, you could find their land ratio, pull the land value out of the property that also be an estimate, and then just run the back of the napkin rule of thumb against the actual building itself. For more accurate projection. If you’re doing due diligence on properties, you probably want to do that probably after you consider that property already being a viable investment for you. Just so you’re not spending time pulling property tax cards of every single property you might come across. But yeah, I mean, that would be the more accurate way for sure. Yeah. All right. So that’s on direct properties. Now, if you’re with partners, you’re going to have to take you know, the percentage allocations, the profit allocations that you guys have into account. So if you’re 5050 with a partner, you’re gonna expect half of that to be passed through to you, assuming you split profits, all profits and losses equally 50%. So that’s just how it’s going to work with a partnership. Just understand that that you’re not going to get a home 100% of it unless you specially allocated to yourself, which we’re not going to talk about today.

Brandon Hall 20:04
Now you see estimated bonus depreciation, right? So we buy this million dollar 10 unit apartment complex, it’s $250,000 of bonus depreciation, that’s great. But what is my actual tax loss? That’s what you also need to be estimating, right. So you really need to build out a pro forma, or you need a spreadsheet that’s going to estimate the rents that I’m collecting the expenses that I’m going to incur, and then throw depreciation in there as an expense for your 250k of depreciation there as an added expense. And then that Excel sheet that projection that pro forma, will show you a projected tax loss, because you know, I make this mistake sometimes where I just kind of talked about bonus depreciation, and that also being the tax loss, but that’s not necessarily true. I mean, if I buy an apartment complex in February, and it’s gonna cashflow all year, I might have 120k or so of cashflow by the end of this year. I don’t know if that if those numbers make sense on a 10 unit. So don’t hold me to that if you’re listening and you’re trying to like do that. I’m just making these numbers up. But I might cashflow 120k this year. So if I take 250k bonus depreciation, I’m going to subtract out my net operating income and I use those words interchangeably even though I know again that they’re not interchangeable. But if you’re if you’re listening, I’m just trying to make a simple example here. 120k cash flow 250k bonus depreciation my spreads $130,000. Right, that’s the variance. So I’ve got $130,000 tax loss, not a $250,000 tax loss. Now the bonus depreciation still did its job, its sheltered $120,000 of cash flow from taxes, right? Pretty darn good. Right, right. Pretty darn good. And now I’ve got an extra $130,000 tax loss. And that’s where I start applying the passive activity loss rules to figure out is either my passive bucket or my non passive bucket, can I move it into my non passive bucket? Do I need to move it into my non passive bucket? So that’s where you go back to the episode we just recorded last week and in re listen to that and apply those rules to figure out what do I do with this $130,000 tax loss. But it’s just important to walk away from this knowing that bonus depreciation does not equal tax loss, you have to factor in the rental income I’m going to receive and the net operating expenses that I’m going to pay in then add depreciation on top of that, that’s going to get you your tax loss. And it might be more, and it might be less, it just kind of depends on the timing of the acquisition. If I buy a property on 1231, my bonus depreciation is probably going to be my tax loss. Because there’s no rental income, there’s no expenses, right? Or if they are, they’re probably a wash. So my bonus depreciation is gonna be my tax loss. But if I buy property early in the year, my bonus depreciation, it’s not going to be my tax loss, my tax loss will probably be less, because I’ve got a whole year of operating income from this property. And it’s important to understand this concept too, because we’re about to talk about syndications, how you can estimate the bonus depreciation coming out of a syndication. And a lot of the same rules apply. It’s figuring out the bonus depreciation that I am going to be able to claim and then applying that to my pro forma to figure out how much tax loss I have. And now you’re just doing it on bigger properties. If we’re talking about, you know, the case of a syndication, and you’ve got a lot of partners, so it’s a little bit more complicated, but it’s the same general premise of I’m buying a property, I’m estimating my bonus depreciation, and I’m estimating my net operating income.

Thomas Castelli 23:25
Yep, that’s what you’re gonna have to do to get the tax loss. So having said that, let’s just jump right into the syndication side of things. And so I know Brandon, you gave a really good explanation on I think a YouTube video we did on this. So do you want to you want to jump in on that one?

Brandon Hall 23:39
Yeah, sure. All right, hold

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Thomas Castelli 23:40
on one second branded. Before you dive right into the explanation. We do want to let everybody know that our next podcast will be announcing a brand new Bootcamp for landlords and buy and hold real estate investors. If you want to stay in the loop on the bootcamp and related special offers, join our tech smart investors Facebook group by visiting One investors or by searching for tax warn investors on Facebook, we’ll see you in there. But for now, Brandon, back to you.

Brandon Hall 24:06
So a really simple way to estimate the tax loss that will be passed back to you. When you are investing in a syndication I’m going to explain that you need a couple things. You need the operating agreement from the syndication, you need an open line of communication with the general partner or general partners of the syndication, not the person raising capital, right? Because that can be a capital raiser, I can you know, raise a million bucks and you know, somehow work out an agreement with the GP to bring my million dollars into the deal and own part of the deal. You know, you see that out there. But you want to direct line of communication to the actual sponsor of the deal because they’re the ones holding all the tax cards right. Now, typically this is going to be in the operating agreement. So but just in case there’s any questions when you invest in syndication if I put $100,000 into syndication with bonus depreciation today, we are seeing Hey, once I come back with 8090 $100,000, passive losses passed back, right? So the question is, when I put $100,000 in or a million dollars in or 500,000 or $50,000, into a syndication, how much of that investments going to come back to me in the first year as a tax loss, that’s what we’re going to cover. So what you need, you need the operating agreement, you need the pro forma, you need the projection, and an ideally, an open line of communication with the general partner. Here’s where you start. You see you go to the operating agreement, step one, go to the operating agreement, go to the profit and loss section of the operating agreement. How are they allocating tax losses? Okay. And actually, this isn’t really step one, you could do this at any step. But how are they allocating tax losses, a lot of operating agreements, I would say, probably the most equitable, not necessarily the best, but the most equitable operating agreements are ones that say any losses generated from this, this partnership activity will be passed to to our members of the or a class members. And those are typically the investors, right, we’re going to pass them to our limited partners in the deal. So we’re going to pass all tax losses to our limited partners until their aggregate capital account reaches $0. And what does that mean? That means if I put $100,000 into the deal, I’m going to get $100,000 of tax losses back before the sponsor can claim any tax losses. Now if I’m an investor in the syndications, that’s exactly what I want to see, I don’t want to see that I’m going to put $100,000 into the deal. And I’m only going to get 50% of the tax losses, while the sponsor is going to get 50% of the tax losses, because I’m the one taking the financial risk here, right. So I want the tax benefits, since I’m taking the financial risks. So I get all the tax benefits. First, once you max out my tax benefits, I could care less what you do about your own. But we’re not splitting tax benefits until mines maxed out. That’s kind of what I think is the most equitable way to approach the syndications. So you have to look at that profit and loss section. Because sometimes the loss section say we’re going to split losses, pro rata based on your economic interest in the deal. And what that means is if I own a 5% stake with my $100,000 contribution, I get 5% of the tax losses. And the general partnership could own 30% of the LLC, but they could have put $0 into the deal. And they’re going to get 30% of the tax losses. And they can probably claim those tax losses, thanks to something called qualified non recourse debt, which allows them to claim tax deductions against the basis that qualified non recourse debt provides them. So it’s beneficial for them. So you might see deal structured that way. And it’s not necessarily wrong, you just need to have a conversation with them about why they’ve structured it that way. And then you need to decide if that deal is right for you. That would probably not be something that I’m investing in unless the deal is sweetened in some additional manner. Because again, I want to see all the tax benefits coming back to me as the investor until I can’t claim any more tax benefits. So I put $100,000 in, I get to claim $100,000 tax loss, you can pass that back to me, I can’t claim anything else, my basis cannot be reduced below zero, as an investor in these deals, unless I’m allocated any qualified non recourse debt, but that we’ll talk about that on different episodes. Alright, so you’re looking at the operating agreement, you’re trying to figure out, how are these tax losses allocated to the partners. And let’s just assume that it says we’re going to allocate 100% of the losses to our limited partners, or our investors until their capital accounts reach $0. All right, well, I’ll just explain to you, my capital account is my $100,000 contribution, minus any losses allocated to me. So if I put 100k in, and I get allocated 100k back, my capital account is now $0, I would have, we would have met that provision in the operating agreement. But if I have 100k in the deal, and I only get allocated 90 back. Now, my capital account is $10,000. So if you see this in your operating agreement, in that profit loss section, where it says, we’re going to allocate to our limited partners until their capital accounts reach zero, you need to know what the aggregate capital account is, you need to know how much money they’re raising. And this is going to be important in a second on estimating what this actual bonus depreciation is going to do for you. So you need to know how much money the whole deal is raising. Because if they’re raising $3 million from all of the limited partners, now, you know, that a $2.7 million tax loss created by this investment, it’s 90%. On the total aggregate capital raised right, you also know or should expect that you’re going to get 90% of your investment back as a tax loss. So you want to know what the aggregate money raised. And that’s why you have to have an open line of communication with the actual sponsor of the deal, because you need to ask them how much money you’re raising for this deal. What’s the total capital that you’re looking at? could be 1 million might be 500k might be 10 million, you need to know. Because the next step here is we’re going to take their pro forma. Now most sponsors are going to give you a pro forma in their deal packet and a pro forma is just like, here’s what we expect to do in year 12345. You know, here’s our plan to make money, and here’s our budget, estimated income, estimated expenses, yada, yada, yada. So they’re gonna do all of that, they’re gonna give you their estimate expenses, we don’t see performance with depreciation factored in. So if you have depreciation factor, then you have an extra step of trying to figure that out. But most of the time, it’s just rental income minus operating expenses. So you got to get that right. And let’s just say that the pro forma that you get shows $100,000 of net rental income, after all the expenses. So net income is $100,000. Cool. So you’ve got that locked in, you got to remember that number $100,000 of net operating income from this deal. The next thing that you do is you go to the general partners again, and you ask, Hey, are we doing a cost segregation study on this property? And if so, do you have an estimate as to the amount of bonus depreciation? We’re going to claim? Typically, there are they’ve already got quotes during the due diligence phase, even before they close. So they should be able to tell you, if they don’t tell you, you can press them a little bit. Well, we’ll just what do you think like, what is an estimate? So I’m trying to estimate the tax losses, I’m going to get passed back to me. So maybe they say, maybe we’re buying a $10 million building, right? And all these questions you’ve asked, you’ve, you’ve recognized that they are raising $3 million to buy a $10 million apartment complex. So $3 million, is our aggregate capital account can’t remember that number. They tell you that they have done Cost Segregation estimates, and they’re expecting a $2.8 million dollar bonus depreciation deduction. Okay, so $2.8 million, is going to be an expense on their p&l in the first year, they tell you that they are going to claim bonus depreciation, so you’re excited about that. And the pro forma that they gave, you showed $100,000 of net operating income. So all you have to do is take that $2.8 million of bonus depreciation, you subtract the 100k of net operating income, and you’re left with $2.7 million of expense. And basically, it’s a $2.7 million tax loss. And then you apply that $2.7 million tax loss to the entire amount of capital raised $3 million, and you get a ratio of 90%. And you take that 90%, and you apply it to your amount invested of $100,000. So you know, that you should receive about a $90,000 tax loss passed back to you, again, assuming that our operating agreement checks out the way that I said it should. And that means that if you get a k one, at the end of the year, with $50,000, of tax loss passed back to you, you should go and ask further questions. That’s what it means. Because something didn’t align, right. Maybe they earn more money, which is great for you at the end of the day, or maybe they just got wonky accounting and somebody messed up, which happens, you’ll be surprised. So that is how you estimate you know, when you hear about people getting these massive tax losses back, the cool thing is that you can estimate all this stuff before you ever pull the trigger on investing in a syndication because of these simple steps the operating agreement is distributed to you before you invest, the performance is distributed to you before you invest a 10 minute call with the sponsor to figure out how much capital you’re raising? And are you doing a cost segregation study that’s available to you before you invest? Those are the only things that you need to get a general estimate as to what amount of bonus depreciation or what amount of tax loss is going to be passed back to you. And then it’s just a matter of applying the passive activity loss rules to figure out if you can claim that tax loss.

Thomas Castelli 33:52
Now awesome explanation awesome explanation. So

Brandon Hall 33:54
one of the sponsors, little little windy, sorry about that, hey,

Thomas Castelli 33:57
I made that you have a video on YouTube to a walkthrough as well. So anybody who’s not checked out YouTube, go ahead, check that out, make sure you like comment and subscribe while you’re there. But um, ya know, so I was looking, I invested with a sponsor i with a syndicate the fund last year and 2021. And they actually sent me my estimated share of allocation of losses for the year. So that was awesome, but definitely good way to estimate it, because not every sponsor is going to do that for you. Alright, so I think that’s about it for today’s episode, if you’re looking to take advantage of bonus depreciation, just know that 2022 is the last year that 100% bonus depreciation will be in play. So that means you have to if you’re going to if you’re planning to take advantage of that you want to acquire in place properties and just service before 1231 2022. So the last day of this year, or you want to invest in a syndicate that’s been run Cost Segregation studies before that date as well. So just something to keep in mind. Happy investing. We’ll catch you on the next episode.

Brandon Hall 34:54
Thanks for listening to today’s show. If you enjoyed the show, please find us on iTunes and leave This review, you can also email us at contact at the real estate CPA comm with any feedback or topic suggestions, we are always taking on new clients and with the new tax laws in play. You really don’t want to navigate this alone. Let us help you save money on taxes with your accounting and CFO needs. To become a client. Navigate to our client page at the real estate CPA calm and fill out a webform with as much detail about your situation as possible. Thanks so much for listening. Have a great rest of your week.

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