The Tax Advantages of Investing as a Limited Partner: A Personal Example

Since 2019, I have been investing in limited partner real estate deals. Here is the year one depreciation I was able to get through bonus depreciation combined with a cost segregation study.

Lake Dallas Apartment Homes, 300 Swisher Rd, Lake Dallas, TX 75065

Summary:

From this investment, I was able to get $57,861 in depreciated in the first year. $57,861 / $85,000 = 68% depreciated.

How I can use this:

In limited partner deals, my depreciation counts towards accumulated passive losses.

I can use it towards any cash flow or capital gains. If I do not use the full amount during the year, it carries over indefinitely.

If I want to use this depreciation towards my active income, you'd have to have BOTH real estate professional status and 100+ hours of material participation in a deal.

You can then use what's called "aggregate grouping" to treat all your investments as one.

This essentially uses your 100 hours of material participation towards all your investments. You can now use limited partner depreciation towards your active income.

Either way, both passive losses and active losses are an incredible benefit. For my present situation, I have hundreds of thousands of dollars worth of accumulated passive losses.

Essentially what this has created is a tax deferred investment vehicle.

When a deal does sell, the IRS will do a tax recapture.

Simply put, they're saying we gave you more depreciation than the property itself depreciated and want some back.

Your accumulated passive losses might drop when they take some back.

However, when the deal sells you get your initial investment back, plus the profits.

If you take this and put it into another deal, you'll get another lump sum of depreciation year 1.

Note:

As of 2023, 100% bonus depreciation is phasing out. At the current legislation, 2023 can get 80% bonus depreciation on anything that has a depreciation lifespan of 15 year or less. Each year it will drop 20% until fully phased out...60%, 40%, 20%, 0%.

Disclaimer:

This does not qualify as legal or tax advice. The information disclosed is merely Noah's opinion on the tax code. Your situation could be different in what applies or doesn't apply to you. Consult with your CPA for your own specific situation.

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