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If you want to invest in real estate but don't want to deal with the hassle of buying and managing a property yourself, real estate syndication is a viable option.
This article delves into the following topics:
What exactly is property syndication?
What exactly are syndicators?
Is real estate syndication the right choice for you?
What are the tax advantages of real estate syndication?
Let's take a closer look at each.
What Is the Definition of Real Estate Syndication?
In a nutshell, a real estate syndication is a group of investors who pool their funds to purchase large, profitable real estate assets. Apartment buildings and storage facilities are two common types of commercial real estate purchased through syndication.
Because the average investor may not have the funds to purchase an entire 300 to 800-unit complex, syndication allows each investor to passively invest in exclusive real estate investments.
An experienced, knowledgeable Operator partner will assist you in navigating the purchase, overseeing the ongoing management of the property, and exiting typically in 3-5 years once the asset has been renovated and stabilized, which is a critical difference that real estate syndication provides to investors.
What Do Syndicators Do?
Syndicators of real estate are also known as "General Partners" or "Sponsors." They are in charge of identifying and screening potential investments. When they find a potential asset, they create an investment strategy that aims to provide positive returns and ongoing passive income to investors.
Bazaru Capital, for example, is an active investor in the properties it recommends. This aligns their interests with those of passive investors, allowing them to choose the best assets, generate passive income, and accelerate equity returns when the property is sold. Syndicators handle things like: To allow busy professionals to avoid the headaches of being a landlord, syndicators handle things like:
carrying out thorough due diligence on each property
Creating detailed financial plans
Negotiating with the property's sellers
Creating a pool of potential property investors
Property administration
Developing and managing investor relationships
Is Real Estate Syndication a Good Investment for You?
Due to the potential risk and sophisticated nature of the investment, you must be qualified as an accredited investor to invest in a real estate syndication. When you meet one of the following criteria, you are an accredited investor:
Earned more than $200,000 ($300,000 with a spouse) in the previous two years, and you reasonably expect to earn the same amount this year OR
You have a net worth of more than $1 million, either alone or with a spouse (does not include the value of your primary residence)
Investors who meet these criteria and want to diversify their current portfolio, earn passive income, build wealth, and benefit from tax breaks are ideal candidates for passive investment in a real estate syndication.
What Are Some of the Tax Advantages of Real Estate Syndication?
Real estate syndication can help you get tax breaks, deferred income taxes, and lower tax rates.
Reduced capital gains
When a property is sold, capital gains occur. While these profits are considered income, capital gains are taxed at a lower rate than traditional income.
If the property is held for more than a year, the gains are considered long-term capital gains and are taxed at a lower rate. As a result, any income generated by real estate syndication becomes more tax-efficient for you as a passive investor.
Deduction for Mortgage Interest
If you invest in a real estate syndication, you can deduct mortgage interest as a property owner if there is a building-related loan in place. This can be deducted from your taxable income, lowering the amount of income taxes you may owe.
Exchanges 1031
Capital gains taxes can be avoided by rolling investment gains into a new purchase. As a property owner, a 1031 exchange allows you to sell one asset and buy a like-kind property within a set time frame while avoiding capital gains taxes. This means you have more money to invest and defer capital gains until you sell an asset and keep the profits instead of rolling them over.
Depreciation
One of the most significant tax benefits of owning real estate, according to many real estate syndication investors, is depreciation. Depreciation allows you to deduct the cost of a property over time, even if its market value is rising.
Depreciation can also be used to pay lower capital gains and offset any gains from other investments. They can also be carried forward if your losses exceed your passive income, allowing you to use the credits when your passive income rises at a later date.
Carryforward Losses to Reduce Capital Gains Taxes
It's not uncommon for the first year of syndication to have a high depreciation rate and mortgage interest, resulting in deductions ranging from 80 to 130%. This issue is easily solved by deferring the losses to later years.
Tax Advantages of Investing in a Syndication
Receiving tax benefits when investing in syndication is contingent on a number of factors. The most common factors influencing your potential tax benefits are the type of entity, whether you share profits, capital, or both, and whether you took an equity or debt stake.
The majority of syndicates are organized as limited liability companies (LLCs). LLCs are extremely adaptable and can have multiple classes of shares owned by investors. These various share classes frequently represent different stakes in the entity's profits and capital.
If you own an LLC and have an equity stake in it, you will receive a pro-rata share of the entity's profits and losses. This means you will receive a portion of whatever tax strategy the entity employs.
When an LLC files its tax return, it will claim all of its income and deductions and will provide you with a Form K-1. The K-1 form will be used to prepare your personal tax return and report your portion of the entity's profits and losses.
You will receive interest income from the entity as a debt holder. You will not share in the entity's profits and losses, so you will not benefit from any tax strategies implemented by the entity.
It's important to remember that you won't have to pay taxes on funds distributed by the LLC unless the distribution exceeds your basis in the LLC. This is a common source of confusion because clients will receive $50,000 in distributions, but their Form K-1 will show a passive loss.
In this case, despite receiving $50,000 in distributions, the investor would not have to pay taxes because of the loss reported on the K-1. Instead, these distributions would reduce the investor's basis in the entity and would be considered a capital return.
The Next Step
At Bazaru Capital, we are proud to offer passive real estate investment opportunities to help you build generational wealth for your family while maximizing your tax benefits.
You can join our Investor Club to begin investing in exclusive real estate assets through syndication.