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SYN 01: How Real Estate Syndicate & Fund Sponsors (GPs) Can Minimize Taxes & Streamline Tax Filing

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In this episode, Brandon Hall and Thomas Castelli discuss how syndicate and fund sponsors are taxed on their various streams of income, how they can streamline their tax-filing process, and how to speak to investors about K-1s, passive losses, and more.

This episode is sponsored by our free Tax Smart Investors Facebook Group.


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. 

Brandon Hall 0:05
Your source for all things real estate, accounting 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 0:30
Everyone, thanks for tuning into this episode of The Real Estate CPA podcast. This is episode one of two in the syndication series. And we're gonna be talking about tax implications for general partners or sponsors of a syndication, suppose specifically real estate syndications. But we may end up touching on some other syndicates as well. And to kind of kick it off, we want to help everybody understand how various sources of income for syndicators or for sponsors are taxed. So as a syndicator, you're gonna have two buckets of income, right, you're usually gonna have fees, fees are going to include your acquisition fee, disposition fees, if they're their asset management fees, refinance fees, pretty much any other type of fee that you could toss over to your limited partners, those are the fees that we're talking about here, those fees are going to be taxed as ordinary income, right. And they're going to be generally non passive, which means they're going to be subject to the self employment tax, as well as your ordinary income tax rates at the federal level. And depending on what state you live in, at the state level, as well. And one of the ways that we help clients mitigate self employment taxes is through S corporations. Now, depending on your situation, if you're in syndication, full time is your full time endeavor, then you're going to be subject to you everybody is subject to self employment tax up to the first $142,000 Give or take of their income, right. And that means that and the self employment tax is 15.3%. And that makes up the FICA tax, which is Social Security, as well as the Medicare portion. So what you're going to do is try to shelter some of that, if possible, the way you can do that is through an S corporation, right? The way an S corporation works is you open up a corporation, you will receive your fees in the name of the S corp, you'll pay yourself out a wage, the wage has to be reasonable for the work you're performing within your business. So you have to work with a CPA to determine what that wage is. But the wage, you only going to pay the self employment tax on the wage and not the distributions, or the remainder of the profits from the S Corp. and kind of just give a quick example of how that works. Let's say that you make $100,000 in fees, right? If you don't have an S corp, and the only thing you do you do syndication full time, you're going to be looking at paying around $15,300 in self employment taxes on that $100,000. Again, this is not in the S Corp. Now, once you open the S corp, if you receive that same $100,000 through the S Corp. And let's just say you sit down with your CPA, you determine for the work that you're doing for that business that your reasonable salary should be $40,000. Well, in this case, you're only going to pay the self employment tax on that $40,000. And in that case, that self employment tax is going to be I'm going to give you the example right here is going to be $6,120. And again, that's significantly less than the 15,300 you would have paid had you not use the S Corp.

Brandon Hall 3:42
And I know that there's a there's different ways to look at the acquisition fee some some practitioners take the stance that you can roll that acquisition fee into the deal and not pay tax on it today and pay tax on it at some later point whenever the syndication liquidates. And our stance has been that once you earn that fee, it's constructively yours in the year that you earned the fee. So you've got to pay tax on it in the year that you earned the fee. And that's reg section 1.4 51 dash two constructive receipt of income. And I would love to know if you are working with a CPA or if you are a CPA, and you're like No, you can roll forward those acquisition fees. I would love to know what citation you're working off of so that we can implement that in our practice as well. But that constructive receipt of income, he have rights to it, you've earned it. And it's constructively yours even if you haven't received it with the one exception, that if there are substantial limitations or restrictions to accessing that income, then you don't have to report it in that year. And the example in that reg section is when an employee is bonus with stock. Just because the employee has been credited the stock doesn't mean that it's actually taxable income to the employee at that time because there's substantial limitations or restrictions on accessing that stock. And perhaps that's actually what people are using, when they're when they're as substantiation or support when they're rolling for those acquisition fees. But our current stance is you just you pay tax on those acquisition fees in the year earned.

Thomas Castelli 5:19
And that acquisition fee is going to be usually the most substantial fee that you're going to receive in the deal. Typically, it's one to 2%. In most cases, from at least my experience, I've saved between one and 1.5. Very rarely do I have received two. So for example, if you're buying a $5 million dollar building, and you're getting a 1% acquisition fee, you're looking at a $50,000 fee. Now, if you're doing a $10 million building, that's gonna be $100,000 fee. And that's, that's a substantial amount of income to receive in one year. And again, if we go back to the example I was just talking about, you're going to have a 15.3% self employment tax on that $100,000. Assuming this is the only thing you do, and you receive that $100,000 as basically an individual and not an S corp. So this is something you're going to want to keep in mind, if you are going to be receiving substantial acquisition fees over your career as a syndicator, you're going to want to sit down with your CPA and ask them, Hey, does an S corp make sense for me? And how can I structure this with the various other interests I'm going to have in my other entities and the other partnership entities, so that you can take advantage of this rule and kind of cut down your, your the amount of self employment tax, you're gonna ultimately pay the federal government?

Brandon Hall 6:34
And what was that second bucket of income that you mentioned? So the first bucket was all this self employment income? What's bucket number two?

Thomas Castelli 6:39
Yeah, so bucket number two is going to be your carried interest, which is going to be the portion of the deal that you get as a syndicator. Right. So typically, as a real estate syndicator, you're going to share in the profits with your investors, right. So there's going to be a waterfall structure that's going to be in the operating agreement, which is important to review the program to understand how that works. But a way to simplify the concept is usually this can be something like an 8020 or 7030, split with your investors, right. And that 20% That 30% That you may receive as the sponsor is going to be taxed at a different rate, it's going to be taxed at its this is called a profits interest, right profits that interest, the character of the income remains the same. So that means if you're going to get a long term capital gain from the sale of the real estate, from all that force depreciation you did through your value add, right, that's going to be usually considered a 1231 game. Now, there's going to be other portions again, that you may have to as a sponsor, such as 1245, recapture, or 1250, recapture from the depreciation of the building over the course of the period that you owned it. But in a lot of cases, and I can speak from experience on this, you're going to have a big section 1231 gain if you do everything correctly, and that section 1231 gain is taxed at the capital gains rates, which is 15%. If you're under I think it's around $501,000 of income as of 2021. Or if you're married, or it's going to be taxed at 20% rate if you're above that. So those rates are significantly lower, then the ordinary income tax rates, which could be up to 37%. If you're receiving a large amount of fees every year between acquisition fees, asset management fees, those are typically be taxed at the ordinary income rates that again, go up to 37%. Whereas these other bucket of income, the gain from your interest in your sweat equity, if you will, in the partnership is going to be taxed at these lower capital gains tax rates, which is why carried interest sometimes get a bad rap with the general public. And that's because the income you exchange for services, like if you work for business and you receive a wage, that wage is going to be taxed at ordinary tax rates up to 37%. But in the case of sponsors, you're exchanging services for an interest in a partnership. And those interests are not taxed at the ordinary income tax rates. If there's a gain for your exchange for services, you increase the value of the property, that's going to be a 1231 gain, then that's taxed at 15 or 20%, which is much lower than the ordinary income tax rates that you're normally paid as a wage or as business income, which is earned income that you get from exchanging your time or you're changing services for money. And in this case, you're just getting a lower tax rate, which if you think about it actually makes syndication a more favorable way to earn income, especially when you consider which we'll get into next. The fact that you can offset this income you can offset the income that you're earning from these interest in these partnerships with losses from other activities, right. So if you're a passive investor and you're not a real estate professional, your interest, your sweat equity in the partnership, so your 20%, your 30%, that is still going to be passive in a rental activity unless you're a real estate professional. So what does this mean? This means that you're exchanging services for this interest in this partnership, which would normally be taxed at ordinary income tax rates if you receive wages or business income, but they're still going to retain their character in the partnership. So what that means is you can use passive losses from other activities such as rental real estate to offset the gain on sale, when you ultimately liquidate the property that's in this partnership that you're sponsoring, or you're the general partner.


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Brandon Hall 10:41
Now let's talk about real estate professional status. Because a lot of sponsors think that, hey, if I'm on the GP team, I'm automatically a real estate professional. And, again, we have to really go to section 469. Understand what it takes to qualify as a real estate professional and understand what material participation looks like. Typically, in a syndication deal, one of the sponsors is going to be the actual person running the deal. That person is typically the real estate professional. So if you are just part of the GP group, because you're raising money, you're probably not going to be a real estate professional. Now, are there any tax court cases that confirm this? No, because the likelihood of the IRS and tax court being able to come in and substantiate the fact that you raising capital and being part of the GP, you're not a real estate professional, you're not materially participating? That That's true, that's going to be a low likelihood of happening, but it doesn't mean that it couldn't happen. And so the facts are, if you take this interpreting this narrower interpretation of the code, just because you're raising capital does not make you a real estate professional does not make you materially participating in this deal. You're not really running a real property, Trader business, somebody else is running the real property trader business is probably not you. Now everybody's facts circumstances a little bit different. So you might be raising capital and doing these other things. And then you might actually be a real estate professional, you might actually be materially participating, the hours that you're spending would actually count towards those various our buckets in those various groupings. But it's one thing that we've had to help people realize that, hey, there's risk. If you're just going to go raise capital for several syndications, there's risk, that if you get audited, you might not actually be able to substantiate that you are a real estate professional, and that you materially participated in real property trades or businesses or in this rental activity. So just go into it, understanding that now, when you are a general partner, so as we just mentioned, you got two buckets of income coming back to you, you've got the initial acquisition fees and self employment income to management income, and then you've also got any sort of share of your passive income or passive losses, and then that eventual capital gain at the end. But if you are a real estate professional, it might be in your interest. Well, it is in your interest, to try to allocate as much loss to you as possible as a general partner, right. So I want to go and structure this operating agreement to allocate losses to the general partnership as much as I can. Or I want to make sure that this cost segregation study that I'm getting exceeds my limited partner capital accounts, so that there's some amount of leftover, some amount of bonus depreciation leftover that's going to be allocated to me, that's going to create a tax loss for me, because my qualified non recourse loan is going to give me basis to take those losses. And if I'm a real estate professional, and I'm materially participating in rental activities, this tax loss is non passive for me. So general partners in real estate partnerships, if you structure the deal correctly, you can put very little money or no money into the deal, but you can still be allocated tax losses. Because of that qualified non recourse debt, it gives you at risk basis to take the tax losses. If you structure your operating agreement, right, you can be allocated tax losses. And if you're a real estate professional, and if you're materially participating, those tax losses are non passive, and they will offset any other income that you have coming in. Now, should you allocate tax losses to yourself? Depends depends on who your limited partners are, if I'm a limited partner in your deal, I don't want you to allocate any tax losses to yourself before my capital account reaches $0. So I want to be allocated tax losses, to the extent that I've contributed capital, meaning that if I put $100,000 in your deal, I want $100,000 of tax loss is allocated back to me before you as the general partner, get it done. But you might be able to run your deal a little bit differently. We've seen deals run differently. So it just kind of depends on the deal that you're structuring how you're setting it up. What the economic benefit is that you are trying to drive home for your investors and yourself. But we have seen general partners be able to allocate tax losses to them, even though they put $0 into the deal. And they specifically do this when they are a real estate professional when they are materially participating so that they can take those tax liens and also the rest of their income.

Thomas Castelli 15:01
So something you want to be aware of also as a syndicator is the cost of doing business, right? I can't give you all the numbers for all the costs of doing business on this podcast, however, what we can talk about is the accounting fees that you may incur as a syndicator. Right. So, first concept, the breakdown is property level accounting versus corporate accounting, right, or the entity level accounting, if you will. So when you have a property manager, most syndicates that, you know, that we work with that we see are using third party property management. And if you have a good third party property manager, they're going to be doing the accounting at the property level, that means they're tracking the income, the rental income and the various expenses that you're incurring, or they're incurring on your behalf while running the property. And they're going to give you an income statement at the end of the year, or periodically every month, that shows you the accounting at that property level. Now, sometimes the property managers may or may not be doing the capital expense accounting for you, it's something that you may have to do on your own. Or you may have to outsource that to an accountant who could do that for you. That was also going to be expenses that you're incurring at the entity level that the property manager is not going to account for. And what I mean by that is you may have an entity where you and your general partners are going and you are incurring certain expenses, such as meals, or mileage, or just general marketing expenses for your syndication business that your property manager is not going to account for. So that all needs to be consolidated right at the end of the year, you need to have your entity level expenses and the property of expenses consolidated into Financials that you can actually use to prepare your tax returns or that your CPA can use to prepare your tax returns. So it's important to note that simply the income and loss statements that your property manager giving you on a monthly or a yearly basis are not tax ready, and there's going to be additional accounting that needs to take place before they're able to be input into your tax return. That's something you want to keep in mind. And few some some sponsors want to do that accounting, they're set themselves or maybe you have a large enough group, where you have an in house accountant who consolidate sets for you. But if not, you may want to consider outsourcing that to a CPA firm, we can help you with that we have a lot of syndicates that we work with where we do their accounting for them and make sure that the property level accounting is also consolidated with their entities so that the tax return can be filed that also not only that, but also so that you understand how you're actually performing as a syndication business. And not just at the property level,

Brandon Hall 17:35
you can hire the best property management group, but unless they're like a professional Asset Management Organization, they're not going to have the in house accounting and tax talent to actually give you tax ready financials, what are tax ready financials, that's what you give to the CPA to prepare the 1065 the partnership tax return, so that all your investors can get their K ones on time. So if you don't have tax ready financials, you're not going to get the K ones out by March 15, or by April 15. And you're going to have investors that are hitting you up all year long asking where their K one is. So you just need to understand that your property manager is doing what they're doing on an ongoing basis at a property level. They're looking at it through the property lens, the day to day lens, you really need accounting done at a different level, that recategorize repairs and capital expenditures as needed. That applies the tangible property regulations to those repairs and capital expenditures. Because a lot of times those repairs on those larger properties where your property manager or a CPA that doesn't understand the tangible property regulations, they may book it as a capital expense over 27 and a half years, you work with a really strong team that knows what they're doing. They may say under the tangible property regs, this is not a material improvement to your 100 unit apartment complex, we're going to deduct the cost today. And that's going to create tax benefits for everybody, everybody in the partnership. So you got to make sure that somebody is doing that second level that that let's make sure that we're categorizing everything correctly, let's make sure that the entity level financial financials make sense. That's not going to be a property manager 99 times out of 100. We like Tom said we work with a lot of syndicates on accounting. Their property managers do a great job at detailing the day to day transactions, they do not do a great job at providing entity level financials. So think about reporting to your investors on a quarterly basis. If you're just using the day to day financials that your property manager gives you. You're reporting that on a quarterly basis, well, your year end financials are going to look really different than your quarterly financials did and your investors are going to start asking questions. So you need to you can do it. Right like we actually have syndicators that the first one or two deals that they do they do the financials themselves, and then they realize how critically important good financials are to make ensure that this deal is run transparently, accurately, high quality builds trust in the investors. And then they start asking for different solutions which might be in sourcing their own bookkeeping team and might be outsourcing a bookkeeping team or their accounting team. But if you have good financials, good accounting, tax season, preparing those tax turns all of a sudden becomes really easy, because what does every syndicator what every syndicator wants to get their K ones out by March 15 90% of syndicators have bad financials. So we get those books and we go, Well, we got to make all these changes, because you didn't do good accounting during the year. And in this is the first that we know about, yeah, it's January 31. But it's gonna take some time to make changes, and we're not able to get those k ones out by March 15. So if you want to get those k ones out by March 15, if you want to Wow, your investors got to have really, really, really strong accounting in place, and gotta be done by January 31. That way your CPA team can work on those k ones. And if you're like a super, super, super large Syndicate, or a super, super, super large fund, it may just literally not be realistic to get you done by March 15. There there are funds in syndicates out there, that there's just so much cleanup, at the end of the year to produce the tax ready financials, it just takes too much time and just not able to get it done by March 15. And that's a conversation you should have with your CPA, too. And that's okay. But the whole idea here is we want to be able to set really good expectations with our investors, because you don't want to be in a position where you have like 200 investors hitting you up every single week. You know, starting in March, April, May, because investors you know, they get antsy, you know, where's my k one, where's my k one, where's my k one, and you want to make sure that, that you can tell them up front, Hey, your K ones gonna be expected to be delivered in July, you know, don't tell him March and then deliver in July, because that's gonna make you look bad. So make sure that you have this conversation with your CPA team up front. When do we think that we can deliver these k ones I can tell my investors in mass, just that they can have the right expectation.

Thomas Castelli 22:05
And you know, one of the biggest problems we have in the CPA industry is people, the CPAs are too busy preparing tax returns to ever really provide any planning on how their clients can minimize their taxes, which is often costing their clients a lot of money.

Brandon Hall 22:18
And so I'm and I've worked with over 1000 real estate investors on tax planning over the past six years, we've saved them millions of dollars in taxes. And the reality is, is that tax planning, especially one on one is really expensive. It's not in the budget for all real estate investors. But real estate investors are near and dear to Tom and his heart, we're real estate investors, our parents are real estate investors, we want to help every single real estate investor out there. So we created tax smart investors.com. There's three subscription tiers, you can get a content subscription tier that gives you access to gated content, and we write it in a way that you can digest it. But there's also citations that you can go to your own tax payer and say, Wait a second, this is how it's actually supposed to be. And here's the citation. On that content subscription, you also get access to a weekly tax strategy newsletter. On top of that, we also have a subscription that gives you access to our insiders Facebook group, which just allows closer access to Tom and I and our team of CPAs. You can schedule paid calls with us. And you can get access to our monthly workshops through that subscription tier and those monthly workshops. We're doing tax planning, financial planning, we're going over accounting strategies and how to automate your systems. And then we have a top tier

Thomas Castelli 23:26
and that top tier, that's really where you get access to us and our team of experienced real estate tax planners. And you could do that through two calls, we'll take a look at your situation and determine what strategies you can use and minimize your taxes based on where you are where you're looking to go. And in addition to that, what a lot of our clients have loved over the years is the ability to send emails where you could send in your question, and we'll get back to you with an answer within 48 hours. And you should definitely check that out. If you're sending questions to your CPA and they're taking weeks to get back to you if they ever get back to you. Or they're not providing with any planning we can take a look at your situation and determine what can be done to help you save on taxes. Yeah, yeah. And you have to you really want it this could be comes into an investor relations conundrum. And I've I've worked with a lot of syndicators. I've, you know, went through syndicating courses and, you know, kind of mentored by a few syndicators. And, you know, you have to set really good expectations and you have to make sure that your investors are sophisticated enough whether or not they're accredited. To understand these timelines and understand that hey, look, you may have to extend your personal return, okay, you may have to extend your 1040 beyond the 415 deadline, because the last thing you want is to have 100 investors right, knocking at your door calling your cell phone emailing you texting you asking where their K one is, right? Because either a they didn't understand that, hey, look, might your cable may be late because you didn't set the right expectations, or that just in general that this is how this kind of investment works, and it's not a stock investment where you're going to receive it. 1099 from the brokerage in a timely matter, and I think it's just something that, you know, as a syndicator, you have to sit down with your investors get to know your investors, make sure they understand this up front before they invest with you. So you don't call yourself investor relations nightmares, and I've seen it happen, I've seen it happen. And being the business of client service myself, I can understand the pain that some of these syndicators feel. And if you don't want to feel that pain, and you want everything nice, clean organized, it starts by setting the right expectations up front with your investors. And again, probably gonna sound like a broken record here, you have let your investors know that look, there's a good chance that you may have to extend your 1040. And this is just the way this this these type of investments work. Alternative Investments just work that way in some time.

Brandon Hall 25:49
Yeah. Yeah, if you want to do this successfully. And you know, I have not syndicated my own deals. So take this with a grain of salt. But we work with a ton of syndicators. And we work with them on these types of communication strategies, because we talk about the timing and how they could potentially tell their investors these things. And over the years, what we've learned is, as long as you proactively communicate with your investors, you're going to be fine, you will be totally fine. Even if the deal starts tanking, if you communicate with your investors that the deals tanking, you're gonna be fine. Here's what when you stop communicating, everybody gets nervous, right? When the deal starts going bad, and you don't communicate, and you're a couple days late on that report that you're supposed to give. And that starts to become a trend. People get nervous, they start calling their attorneys, they start getting other parties involved to see if you're legit, or if you're screwing them or whatever. So just all you got to do is just have proactive, upfront communication, set the expectations, and set conservative expectations. So you don't have to reset expectations. If you want to do this well. Lock in a CPA team, end of November, early December, and have this conversation with them. Hey, what do you guys need from me? In order to tell me when you expect to get the K ones done? So you're not telling them? I need my K one's done by March 15. A lot of syndicates that come in saying I need my K ones done by March 15. They're living in, you know, I don't know what land but they're just their heads in the clouds. They're trying to deliver on unrealistic expectations. Because their accounting isn't good. They're, it's a first year return, which always takes more work. So make sure that you have this conversation with your CPA team, November, December, and ask them not, don't tell them I need to dump at March 15. Ask them, What do you need for me to tell me the date that you could get it done by and then if they say, Hey, you know, your financials are a mess, we're gonna have to do some cleanup. And we expect that we could get this done by you know, end of June, then you can start having the conversation with them in terms of Well, I was really hoping to get these out by March 15. Is that even a realistic possibility? What would you need from me to get it done by March 15. And maybe they tell you, Hey, we can put one of our accountants on your account to work for 40 hours a week, you got to pay them hourly rate of 150 an hour or whatever, during those 40 hours a week. And we expect that in two weeks, we can get you all cleaned up tax ready financials by the end of January. And we'll be able to get your file by March 15. And then you get to decide if that's a cost you're willing to bear, right? So the whole purpose, the whole thing that I'm trying to say here is if you want to do this, right, you want to set up front expectations with investors, you want to go to those investors mid January and say, Hey, there's a, there's a chance we could get you filed, or there's a chance you're gonna get your k one by this date, conservatively expected by this date. And you can say that confidently, because you've already had the conversation with your CPA team. You've already set that project up, it's already in motion. And now the CPA team just needs to deliver on that deadline, they promised you and they should deliver on that deadline they promised you so so have that conversation upfront. And, and it'll just go way smoother for you. You won't have investors knocking your door down, you know, every week, asking where their key one is because you clearly communicated that upfront with confidence. Now in terms of pricing, you know, accounting pricing is very variable. We can't talk about accounting pricing here because it just it's depends on so many different things. But tax return pricing, I always tell people, it's gonna be about $75 to 150 per investor that you have for partnership tax returns in and that's not totally true. Like if you have a really small partnership for partners, you're not you're not going to have a $500 tax return. It's gonna be like a two grand or $2,500 tax return. But when you get into these larger syndicates, these larger funds, you can generally see around 75 to $150 per investor. And it also kind of helps you think about the the economics behind it too, right? If, if I know upfront that my tax return is going to cost $10,000, because, you know, I think a lot of people first time syndicators go to these like, these groups and things and they learn about syndication and then they learn to budget like $1,500 for all their accounting and all their taxes. And that's total hogwash, you will blow your deal up.

If that's what you're doing, or you're gonna get really, really shabby financial records and tax returns, and that is certainly not something that you want. On your first deal. I can guarantee you we've seen that happen, where we have to go back and fix a bunch of things. And guess what none of those investors reinvest with you. Part of making a successful syndicator successful is getting people to reinvest with them, it's super easy to go back to the same people and have them buy from you again, right. That's why That's why anything any product that you buy, all these businesses remarket to you say, Hey, why don't you buy the next thing, I just signed up for Dollar Shave Club, while they market to me every single week on their next little product that I should add to my bag, that they're going to ship me, right, because it's super easy for me to just say, Yeah, I'm already getting this great thing, I might as well just add this little thing, this extra little thing and my next shipment, it's the same same concept. If you've built a relationship, you've built trust with somebody, they're more likely, it's easier to work with them on a reinvestment than trying to start a new relationship with somebody that you don't know. So you want to crush it, your first couple deals you want to dominate, you want to provide the best client experience. And that means putting really good systems in place, which means spending the appropriate amount of money on legal fees. We're not attorneys, but that's expensive. It also means spending the appropriate amount of money on accounting and tax. So if you're a syndicator, you've got 200 People in this deal, you can very easily see a $15,000 tax return very easily, very easily. And that can help you kind of understand what to set your minimum investment amount at. Right. If I set my minimum investment amount of $25,000, I'm going to have a $15,000 tax return. If I set it at $100,000. That same asset could cost me $7,000 For my tax return, right. So you save money on your professional fees on those taxes and fees when you increase your minimum investment amount, because you're going to have less investors, which means less K ones that we have to prepare less state k ones that we have to repair less state Nexus analysis that we have to analyze. A lot of people don't realize that I could have a real estate property in Texas. So I partnership up, it's all in Texas, oh no income state tax supereasy. Great. But then I get all these investors from New Jersey, New York, they're all plowing money into this Texas deal. Well, guess what? Now I got to File New York and New Jersey tax returns at the partnership levels. Now I've just complicated everything. So you got to be careful where your investors coming from? How many of them do you have, all of that impacts price. And it's going to make it more expensive. The more states that you source investors from the more investors you have, the more expensive those actions are going to be.

Thomas Castelli 33:03
Yeah, and plus, you know, on top of that, you know, having a higher minimum threshold not only helps you save money on the accounting fees, but also saves you headaches on the investor relations side, which actually brings us into another point here, we want to discuss is how to talk to your investors, not only about the cabling, which we just covered, setting the right expectations, absolutely critical to make sure you don't end up with a mess, but also discussing with them how their losses work, right, and we're gonna have another episode and next episode, we're gonna talk, we have an entire episode we're going to dedicate to limited partners, and how they should think about taxes. But you know, when you're talking to your investors, you do not want to over promise the tax benefits. And the key thing to understand when you're talking to your limited partnership investors is that nine times out of 10 the losses that they're receiving via their K ones from the deal are going to be non passive. And what does it mean to them, it means that those losses will not offset their W two income. So please sponsor don't go around telling your limited partners that if you invest in this Syndicate, you can take those losses against their W two income that has not been possible since the 80s. That's outdated information. Okay, that is outdated. And what a lot of sponsors do is actually go and tell their investors this and they'll tell their investors Yeah, sure. You're gonna get the tax benefits these losses you could take, we get your W two income, and then their investors come to us and they say, Hey, you know, the sponsor told me I can take these losses against my, my w two income and now we have to be the bearer of bad news, which is fine, which is fine. That's fine.


HALL_003_CTA---CTA-for-TSA


Unknown Speaker 34:39
I don't like being the bad guy. That Oh, guess sponsors the bad guy.

Thomas Castelli 34:44
Oh, this $100,000 You just invested You thought you're gonna get 70 to 90k back in losses that you're going to be able to offset your W two income with that's not possible. They get very angry. So not only they'll be angry at us for being the bearer of bad news. There'll be angry at you because you told that you could do it and they just invested $100,000 for you. And guess what, that diminished his trust with you, because you told them false information. So you know, it's been

Brandon Hall 35:10
and and we're gonna be angry at you, because they're the investors angry at us. So we're not going to do we're not going to refer anybody over to you, because you just set this bad relationship on this, like this snowball downhill effect. So, yeah, just, but like Tom said, it's all about trust, you know, it's it's just real estate is a relationship business, it really is, the strength of your relationships will determine the level of success that you get to. And if you are transparent, you make the right moves, you do the right things, you communicate correctly, you're gonna crush it, you will crush it in this business, because there are so many bad actors out there, people are looking to place money with people that they trust. And there's so many bad actors out there that people are nervous, right? So all of a sudden, if you come in with this, like hospitable approach this, I'm gonna just create the best investor experience ever approach, you're gonna crush it. But part of that is not setting false hopes and expectations, and so many syndicates, so many sponsors will say, Yeah, invest with us. Like, again, we've seen in the ATM machine space, oh, invest with us, you're gonna get these losses, these business losses, you build off site, your W two income, no, you won't, because that sponsor doesn't understand section 469. So you've got to be careful, you've got to be really careful.

Thomas Castelli 36:25
Yeah, at the end of the day, what you want to tell your investors are there will be depreciation that is passed through to you, you want to probably be very clear on how that will work for them. And you'll need to understand how your operating agreement works in order to convey that to them. So if you want to understand that, that's something we can help you evaluate your operating agreement, but you want to convey to them that they will get some type of loss, assuming that is the case. And then it's most likely going to be passive, which means that it will help offset other passive income, they have perhaps some other real estate they own or other syndicates that they're investing in. But they're going to want to go ahead and speak to their specific tax advisers to determine how much it's going to work for them. Because everybody's case a little bit different. But most of the time, you're not going to be steering them the wrong way, by telling them that is passive,

Brandon Hall 37:11
highly, highly, highly recommend that if you want to do this, well, you get your CPA, on a webinar in front of all of your investors, while you are getting those commitments from the investors. So during the due diligence phase, the CPA walks through the operating agreement, explains very clearly, what is going to be allocated back to the various classes of investment or investment stakes. And and then also talks about, you know, how is this income going to be treated, I highly recommend that you do that. We've done that with a lot of success with our clients. And I think that it's successful, because a lot of syndicates aren't doing that. They don't want to pay the $500 for the webinar for the CPA to sit on and, and host it for their investors. And so they tried to talk about the tax benefits instead, without fully understanding them. And honestly, it just leads to a lot more questions for you leads to a lot, a lot more of your time trying to feel those questions, trying to do your own research to talk to your own CPA, you might as well just hold a webinar upfront. That way, everybody gets the right expectation set from the get go.

Thomas Castelli 38:12
Yeah, yeah, you know, it's kind of brings me into just and I don't want to turn this into some type of business coaching podcast here. But when you're running a syndication, you're playing with other people's money, and like we're talking about, there's a lot of bad actors out there, you want to make sure this is done. Right. Right. You don't want to come in under capitalized or under budget for some of these expenses, right, because how your investors experience your first deal, especially if you're just starting out, or if it's their first time in investing with you, EO could make or break whether or not you're going to have repeat investors or whether or not they're going to go out on the various online forums and Facebook groups out there and start saying that this sponsor doesn't have their act together, you know, they're telling me their K ones are going to be ready by 315, or, you know, march 15. And I didn't receive mine till June, I had to go delay my tax return that's gonna reflect poorly on you, right? Or that they told me that my losses could be non passive and offset by w two income. And that's not the case. And that's because you failed, or you didn't want to spend the money to have your CPA do things correctly. And that goes for any area of your business. That includes the legal side, the property management side, and you know, whatever other areas that you're you're using outside help from, you want to make sure that you're, you're you have the budget and that you're paying the appropriate fees to get the service done, right. So that you can look like and actually be a professional to your investors, and that they can trust you with their money, and they can come back and be a repeat investor. So just very important not to skimp out on things not to cheap out because yeah, you might want to squeeze in an extra profits. And really, frankly, if the deal can't support all this, then it's probably a bad deal anyway, you shouldn't be doing it. And again, that trying to tell you what type of properties to invest in, just make sure that you have the proper budget, so you can be a professional. So that's all that's all for today, folks, I will catch you on the next episode for all limited partners who want to know how this impacts you. Go ahead and check out that next episode and we'll catch you there.

Brandon Hall 40:07
Thanks for listening to today's show. If you enjoyed the show, please find us on iTunes and leave us a 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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The Real Estate CPA podcast is for general information purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Information on the podcast may not constitute the most up-to-date legal or other information. No reader, user, or listener of this podcast should act or refrain from acting on the basis of information on this podcast without first seeking legal and tax advice from counsel in the relevant jurisdiction. Only your individual attorney and tax advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this podcast or any of the links or resources contained or mentioned within the podcast show and show notes do not create a relationship between the reader, user, or listener and podcast hosts, contributors, or guests.

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