How much should I set aside for RE Syndicate that went full circle?

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BAM!
Posts: 269
Joined: Thu Nov 29, 2012 4:56 pm

How much should I set aside for RE Syndicate that went full circle?

Post by BAM! »

My RE syndicate investment went full circle. I'm trying to decide how much to set aside for taxes.

It was ~50k initial investment. 9.5k in distributions throughout the past 4 years. Sold for 55k. I never paid any taxes on this due to accelerated depreciation. I suppose I'll have to pay taxes now that the investment is complete. The profit was 14.5k.

I'm in CA, the property was in SC. Will this be taxed at capital gains rates or regular income tax rates or some combination? Will i have to pay taxes in both CA and SC? I'm thinking of just earmarking half of the profit into a savings account but I am not sure if that will be overkill.
trustquestioner
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Re: How much should I set aside for RE Syndicate that went full circle?

Post by trustquestioner »

You should have been receiving K-1s that track your basis.
popoki
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Re: How much should I set aside for RE Syndicate that went full circle?

Post by popoki »

So you made about 7% annually, or $14,500 which sounds good until you see that VTI would have returned a profit of about $40,300, or 16% annually over the last 48 months with better tax consequences and better diversification.
Gray doesn't matter.
Topic Author
BAM!
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Re: How much should I set aside for RE Syndicate that went full circle?

Post by BAM! »

popoki wrote: Mon May 13, 2024 5:05 pm So you made about 7% annually, or $14,500 which sounds good until you see that VTI would have returned a profit of about $40,300, or 16% annually over the last 48 months with better tax consequences and better diversification.
Haha, in true Boglehead fashion a quick and righteous reply! :D Don't worry, I already made that calculation myself. In fact, SP500 (SPY, VOO, etc) made north of 8% CAGR during my RE hold as opposed to my meager 6% CAGR from the RE syndicate. Glad I was able to reap that benefit in other portions of my portfolio. My RE syndication voyage was more a means of testing the waters and seeing if I liked this form of diversification. In a way, I'm glad I experienced this, full circle, so I can definitively know it's not for me.

And to the above poster, yes, I can follow the details through previous K1s, etc. However, I'm looking for a quick and dirty estimation. Should I earmark a conservative 50% towards taxes or 35% (10% CA + 25% fed)?
jaMichael
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Re: How much should I set aside for RE Syndicate that went full circle?

Post by jaMichael »

I don’t think this was a “bad” investment just because VTI would have performed better. That is kinda like saying buying insurance was a bad decision because your house did not burn down. I think it is a reasonable diversification strategy. That being said, I’ve also soured on RE syndicates after testing the waters the last few years. I like the diversification but not the lack of control and illiquidity (and figuring out the K-1s when tax filing). So I will likely not re-up after these projects run their course.
popoki
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Re: How much should I set aside for RE Syndicate that went full circle?

Post by popoki »

Not sure where you're getting 8% for S&P 500, but from May 2020 to May 2024, VOO was up 16.37% CAGR.

I'd argue that buying into a real estate syndicate instead of a broad index fund is the opposite of diversification. It's not like the recommendation to invest in a broad index fund is a secret, it's been pushed pretty heavily on this forum for decades. With an index fund, you could have tax loss harvested along the way, and you wouldn't have been forced to liquidate your position fully at the end of the 4-year period resulting in a taxable event. Some people advocate REITs such as VNQ (but not in a taxable account), which returned a measly 4.75% over the same period, so at least you beat that.

I don't know anything about the tax implications other than it's complicated and you'll probably need to pay a CPA because people say that consumer tax software isn't robust enough to handle it. Seems like you should have understood the taxation before investing, or maybe it wasn't disclosed to you.
Gray doesn't matter.
JBTX
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Re: How much should I set aside for RE Syndicate that went full circle?

Post by JBTX »

BAM! wrote: Mon May 13, 2024 4:47 pm My RE syndicate investment went full circle. I'm trying to decide how much to set aside for taxes.

It was ~50k initial investment. 9.5k in distributions throughout the past 4 years. Sold for 55k. I never paid any taxes on this due to accelerated depreciation. I suppose I'll have to pay taxes now that the investment is complete. The profit was 14.5k.

I'm in CA, the property was in SC. Will this be taxed at capital gains rates or regular income tax rates or some combination? Will i have to pay taxes in both CA and SC? I'm thinking of just earmarking half of the profit into a savings account but I am not sure if that will be overkill.
https://legacy.calcpa.org/public-resour ... California.

https://www.listingsincharleston.com/bl ... your%20own).

I suspect you will have to pay SC and CA capital gains, but you will get a deduction in CA for what you paid in SC. That’s a guess. Consult a tax expert.
JBTX
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Re: How much should I set aside for RE Syndicate that went full circle?

Post by JBTX »

popoki wrote: Mon May 13, 2024 6:22 pm Not sure where you're getting 8% for S&P 500, but from May 2020 to May 2024, VOO was up 16.37% CAGR.

I'd argue that buying into a real estate syndicate instead of a broad index fund is the opposite of diversification. It's not like the recommendation to invest in a broad index fund is a secret, it's been pushed pretty heavily on this forum for decades. With an index fund, you could have tax loss harvested along the way, and you wouldn't have been forced to liquidate your position fully at the end of the 4-year period resulting in a taxable event. Some people advocate REITs such as VNQ (but not in a taxable account), which returned a measly 4.75% over the same period, so at least you beat that.

I don't know anything about the tax implications other than it's complicated and you'll probably need to pay a CPA because people say that consumer tax software isn't robust enough to handle it. Seems like you should have understood the taxation before investing, or maybe it wasn't disclosed to you.
So your position is that all personal investments should be in VOO?
popoki
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Re: How much should I set aside for RE Syndicate that went full circle?

Post by popoki »

JBTX wrote: Mon May 13, 2024 11:30 pm
popoki wrote: Mon May 13, 2024 6:22 pm Not sure where you're getting 8% for S&P 500, but from May 2020 to May 2024, VOO was up 16.37% CAGR.

I'd argue that buying into a real estate syndicate instead of a broad index fund is the opposite of diversification. It's not like the recommendation to invest in a broad index fund is a secret, it's been pushed pretty heavily on this forum for decades. With an index fund, you could have tax loss harvested along the way, and you wouldn't have been forced to liquidate your position fully at the end of the 4-year period resulting in a taxable event. Some people advocate REITs such as VNQ (but not in a taxable account), which returned a measly 4.75% over the same period, so at least you beat that.

I don't know anything about the tax implications other than it's complicated and you'll probably need to pay a CPA because people say that consumer tax software isn't robust enough to handle it. Seems like you should have understood the taxation before investing, or maybe it wasn't disclosed to you.
So your position is that all personal investments should be in VOO?
I recommended VTI instead of a real estate syndicate in a taxable account. Where I mentioned VOO, I was pointing out the error someone else brought up regarding the returns of VOO.

It appears OP's investment is in taxable. This forum tends to recommend VTI in taxable, although VOO is a close proxy. All of my own taxable & Roth investments are in VTI (except for owner-occupied real estate, because you can't live in VTI).
Gray doesn't matter.
Bayrn77
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Joined: Fri Apr 12, 2024 10:54 pm

Re: How much should I set aside for RE Syndicate that went full circle?

Post by Bayrn77 »

BAM! wrote: Mon May 13, 2024 4:47 pm My RE syndicate investment went full circle. I'm trying to decide how much to set aside for taxes.

It was ~50k initial investment. 9.5k in distributions throughout the past 4 years. Sold for 55k. I never paid any taxes on this due to accelerated depreciation. I suppose I'll have to pay taxes now that the investment is complete. The profit was 14.5k.

I'm in CA, the property was in SC. Will this be taxed at capital gains rates or regular income tax rates or some combination? Will i have to pay taxes in both CA and SC? I'm thinking of just earmarking half of the profit into a savings account but I am not sure if that will be overkill.
I just started testing these waters too to see what I think. Is there a reason why you didn’t reinvest the proceeds in the company’s next project so you can defer the capital gains? Thank u.
Topic Author
BAM!
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Re: How much should I set aside for RE Syndicate that went full circle?

Post by BAM! »

jaMichael wrote: Mon May 13, 2024 6:01 pm I don’t think this was a “bad” investment just because VTI would have performed better. That is kinda like saying buying insurance was a bad decision because your house did not burn down. I think it is a reasonable diversification strategy. That being said, I’ve also soured on RE syndicates after testing the waters the last few years. I like the diversification but not the lack of control and illiquidity (and figuring out the K-1s when tax filing). So I will likely not re-up after these projects run their course.
It was disappointing because some syndicates around that time were double their money in 3 years, etc. So there was some unrealistic hope associated. But all said and done, it was an OK return. It was in a way a hedge, but it turned out to be strongly correlated with the market. RE market had difficulties when interest rates went up, as did the stock market. Oh well!

I agree about lack of control, illiquidity, K1s, etc. I too will likely not re-up.
Topic Author
BAM!
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Re: How much should I set aside for RE Syndicate that went full circle?

Post by BAM! »

popoki wrote: Mon May 13, 2024 6:22 pm Not sure where you're getting 8% for S&P 500, but from May 2020 to May 2024, VOO was up 16.37% CAGR.

I'd argue that buying into a real estate syndicate instead of a broad index fund is the opposite of diversification. It's not like the recommendation to invest in a broad index fund is a secret, it's been pushed pretty heavily on this forum for decades. With an index fund, you could have tax loss harvested along the way, and you wouldn't have been forced to liquidate your position fully at the end of the 4-year period resulting in a taxable event. Some people advocate REITs such as VNQ (but not in a taxable account), which returned a measly 4.75% over the same period, so at least you beat that.

I don't know anything about the tax implications other than it's complicated and you'll probably need to pay a CPA because people say that consumer tax software isn't robust enough to handle it. Seems like you should have understood the taxation before investing, or maybe it wasn't disclosed to you.
May 4 2020, SPY close = 267.01
May 7 2024, SPY close = 517.14

CAGR = (517.14/267.01)^(1/4)-1 = 18%

Yeah, you're right. Not sure how I messed that calculation up. :oops:

In ways a real estate syndicate is diversification (passive income, not perfectly correlated to equities), in others it isn't (more illiquid etc). Thanks for the advice on broad index fund investing. I expect no less on this forum.

An investment in VOO starting at May 2020 would not have been able to TLH because it never dropped below its May 2020 price.

Thanks for the VNQ tidbit! At least it beat that!

Again, this was testing the waters. I'm not upset with the experience and if anything solidifies my already bogleheadish mentality.

I have an understanding of what I'll need to pay. But I'm simply abiding by the old Russian proverb, Trust but verify. Albeit with a bunch of random strangers, but it's been shown that the collective brain generally has the right answer! :happy
Topic Author
BAM!
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Re: How much should I set aside for RE Syndicate that went full circle?

Post by BAM! »

JBTX wrote: Mon May 13, 2024 11:28 pm
BAM! wrote: Mon May 13, 2024 4:47 pm My RE syndicate investment went full circle. I'm trying to decide how much to set aside for taxes.

It was ~50k initial investment. 9.5k in distributions throughout the past 4 years. Sold for 55k. I never paid any taxes on this due to accelerated depreciation. I suppose I'll have to pay taxes now that the investment is complete. The profit was 14.5k.

I'm in CA, the property was in SC. Will this be taxed at capital gains rates or regular income tax rates or some combination? Will i have to pay taxes in both CA and SC? I'm thinking of just earmarking half of the profit into a savings account but I am not sure if that will be overkill.
https://legacy.calcpa.org/public-resour ... California.

https://www.listingsincharleston.com/bl ... your%20own).

I suspect you will have to pay SC and CA capital gains, but you will get a deduction in CA for what you paid in SC. That’s a guess. Consult a tax expert.

Best answer. That's my understanding too. Appreciate you!
Topic Author
BAM!
Posts: 269
Joined: Thu Nov 29, 2012 4:56 pm

Re: How much should I set aside for RE Syndicate that went full circle?

Post by BAM! »

Bayrn77 wrote: Tue May 14, 2024 1:33 pm
BAM! wrote: Mon May 13, 2024 4:47 pm My RE syndicate investment went full circle. I'm trying to decide how much to set aside for taxes.

It was ~50k initial investment. 9.5k in distributions throughout the past 4 years. Sold for 55k. I never paid any taxes on this due to accelerated depreciation. I suppose I'll have to pay taxes now that the investment is complete. The profit was 14.5k.

I'm in CA, the property was in SC. Will this be taxed at capital gains rates or regular income tax rates or some combination? Will i have to pay taxes in both CA and SC? I'm thinking of just earmarking half of the profit into a savings account but I am not sure if that will be overkill.
I just started testing these waters too to see what I think. Is there a reason why you didn’t reinvest the proceeds in the company’s next project so you can defer the capital gains? Thank u.
my understanding is that only certain real estate syndicate investments allow this type of 1031-exchange treatment (Delaware trust, etc). The structure of my real estate syndicate investment didn't allow for this. Additionally, the RE market is cold right now due to interest rates and sellers' price expectations. So there aren't a lot of deals going around right now.
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