In the past, real estate investment was only available through private equity or through REIT’s (real estate investment trust) and was not feasible as a direct investment for many individuals. Real estate developers are not even allowed to market or solicit investments for their project due to so many restrictions by the securities exchange commission (SEC). However, change is inevitable, innovations and modifications of the process and regulations evolved to a higher level of investment strategy. The concept of crowd funding grows where real estate developers now rely greatly on crowd funding sites that they can solicit investment to high-net-worth investors interested and willing to dive into investments. It provides a variety of benefits while reducing risks for investors diversifying their portfolios. Crowdfunding is considered now a new tool, that utilizes even social media network (Facebook, Twitter and LinkedIn) to reach potential investors. In short, it is an exciting to business avenue that lets more people than ever raise the capitol to try out their business ideas.
In a broader sense, real estate crowdfunding is considered syndication, and most investors are perplexed on its tax treatment or tax implications. There are some tax consequences to real estate crowdfunding that all investors should understand. A crowdfunding investor is essentially a part of a partnership.
Any investments in syndication are considered generally passive activities that will generate passive income or passive loss. In real estate scenario two passive activities were differentiated that IRS also considers. Rentals of commercial buildings and retail centers etc., unless tax payer is treated as real estate professional and business in which the tax payer doesn’t materially get involved.
At the end of the year the investor is receiving K1 form signifying an investor to report income or loss, on his tax return following rules for passive activities. If K-1 report is a loss then the investor has a passive loss that can only be offset against passive income which may be subject to other exceptions. When investors combined all passive activities, the investor has a net passive loss then the remaining net loss is effectively suspended and are carried forward to future years and again subject to passive activity rules. Everyone should be aware that passive activity loss is applied each year while rental losses are carried over year after year until losses are used up by offsetting passive income.
Real estate crowdfunding investors have access to several key tax deductions. They will be able to likely deduct annual depreciation of a property over number of years. If real estate investment gains are taxed as capital gains they may be taxed at a certain rate depending on their gross income.
Many investors are unfamiliar with the tax treatment of real estate syndication. To get more understanding and a better view of its tax implications, you had better be engaged with your CPA. And even then, you need to make sure your CPA is well versed on the subject, like here at Camuso CPA, PLLC.
Here at Camuso CPA PLLC, we do have the ability to offer our tax services. We will help you understand syndication and ensure that your tax returns (k-1) is accurately reported. If you are interested to know more about how this might benefit your business, please don’t hesitate to give us a call today to learn more about how we can offer real estate crowdfunding tax help. One of our friendly and knowledgeable representatives will be happy to answer any questions that you have.