Real estate syndications are a popular investment vehicle for high-income professionals looking to diversify their portfolios. They offer access to the advantages of real estate ownership without the burden of direct property management.
These investments offer meaningful long-term income potential, but a common misconception among first-time investors is that real estate syndications provide immediate tax benefits. In reality, the timing and usability of those benefits are more nuanced.
This article explains how tax benefits work in real estate syndications and why you may not benefit in the first year. We’ll also cover how to evaluate potential syndication investment opportunities from a total return on investment (ROI) perspective rather than expecting short-term tax relief.
What is a real estate syndication?
A real estate syndication is a group investment structure that allows multiple investors to pool their capital to purchase large-scale real estate assets, such as apartment complexes, industrial properties, or retail centers. Real estate syndications offer investors access to high-value properties typically unavailable to individuals acting alone.
There are generally two types of investors in a real estate syndication deal: General Partners (GPs) and Limited Partners (LPs). Experienced sponsors are general partners. They identify, acquire, and manage the property. In exchange, they receive an acquisition fee, usually ranging from 1% to 3% of the property’s purchase price. They also receive an annual asset management fee, usually ranging from 1% to 3% of the gross collected rents. GPs are considered active investors.
The limited partners (LPs) contribute capital in exchange for a proportional share of the income, appreciation, and tax benefits. They receive periodic distributions of profits and, assuming the property appreciates in value, a share of the profits upon its sale. LPs do not have any involvement in the day-to-day operations of the real estate portfolio. They are considered passive investors.
Tax benefits of real estate syndications
One attractive feature of real estate syndications is their ability to generate tax-advantaged returns. So let’s take a look at the potential tax benefits.
Depreciation deductions
Although real estate tends to appreciate in value over time, the IRS allows investors to depreciate the value of the building (but not the land) over a standard schedule. That timeline is typically 27.5 years for residential property or 39 years for commercial real estate. This non-cash deduction reduces the property owners’ taxable income.
Cost segregation and bonus depreciation
Many syndications perform a cost segregation study, breaking down the property into components with shorter depreciation schedules.
For example, say the syndication pays $2.5 million for a commercial building, and $500,000 of that purchase is allocated to the land. Rather than depreciating the remaining $2 million over 39 years, the company can get a cost segregation study.
The study finds several building elements, including plumbing fixtures, carpeting, fencing, and sidewalks, that qualify to be depreciated over 5, 7, or 15 years. By dividing these elements into different categories, investors can benefit from an accelerated depreciation timeline for these components.
The investors may also benefit from bonus depreciation, which allows for accelerated write-offs in the early years of ownership (up to 40% for the 2025 tax year at the time of writing this article).
Capital gains treatment
Gains from selling syndication properties are taxed at the long-term capital gains rate, as long as the syndication holds the property for more than one year.
Long-term capital gains tax rates range from 0% to 20%, while tax rates on ordinary income range from 10% to 37%.
Offsetting passive income
Under the IRS’s material participation rules, real estate syndications are typically classified as passive investments. Under the passive activity loss rules of Internal Revenue Code (IRC) Section 469, taxpayers can only use losses from passive activities to offset other passive income, such as income from other rental properties, royalties, or business investments in which they do not materially participate. Those losses can’t offset taxable income like wages or self-employment earnings.
Even when cash flow is positive, depreciation deductions can generate tax losses for real estate investors. Passive investors can use these losses to offset other passive income.
Understanding how and when these tax benefits apply is critical for investors.
Timing of tax benefits: Don’t expect immediate deductions
Many investors are surprised to learn that syndications often do not produce meaningful tax deductions in the first year of investment. There are several reasons for this, such as:
- Delayed acquisition. It can take several months after fundraising before the sponsor acquires the target property. Investors cannot claim depreciation deductions until the asset is placed in service.
- Short holding period within the calendar year. If the property is acquired late in the tax year, the depreciation and operational losses for that year may be minimal.
- Operating income may offset depreciation. If the property generates net operating income from rental cash flow, that income may offset depreciation, reducing the tax loss or potentially resulting in taxable income instead.
Passive loss limitations
Many of our clients are physicians, dentists, and other medical professionals who own their own practices or have substantial W-2 income from hospitals. These income streams are considered active income under the tax code, so these clients generally can’t use losses from real estate syndications to reduce their current tax liability due to passive loss limitation rules.
While the fees collected by general partners are generally taxable as ordinary income, the profits allocated to limited partners are passive income. This means that even if the syndication generates a loss, it may not provide an immediate tax benefit if you don’t have passive income to offset. Without other passive income sources, the passive losses from the syndication investment may be suspended and carried forward to offset future passive income or be fully deductible when the property is sold. The losses cannot be used against ordinary income, such as W-2 wages or S-corp earnings.
For example, say you’re a limited partner in a syndication that generates a $10,000 tax loss in the first year, but you don’t have any other passive income. That $10,000 is suspended. In year two, the property generates another $10,000 loss, but you still don’t have any other passive income to absorb the loss, so you now have $20,000 in suspended losses.
In year three, the property sells and generates $50,000 of capital gain. You can apply the previously suspended $20,000 loss to reduce your taxable liability, even from W-2 earnings..
Focus on ROI, not immediate tax relief
There’s a saying amongst tax advisors: “Don’t let the tax tail wag the investment dog.” In other words, you should evaluate any investment primarily on its potential returns rather than its tax write-offs. This is particularly applicable to investments in real estate syndications.
When evaluating potential syndications, consider the following:
- Cash-on-cash returns. How much income does the property generate annually relative to your initial investment?
- Equity growth. The projected increase in the property’s value and your share of appreciation at sale.
- Internal Rate of Return (IRR). A time-adjusted measure of total return, accounting for both income and capital gains.
- Tax-adjusted return on investment (ROI). Understand how the future tax treatment of gains, depreciation recapture, and suspended losses impacts your bottom line.
While tax benefits can enhance after-tax returns, view them as a component of ROI—not the sole reason to invest.
The benefits of working with a tax professional
Every investor’s tax situation is unique. The potential tax impact of a real estate syndication investment depends on many factors, including:
- Your filing status, whether you file individually, jointly with your spouse, or through an entity
- Whether you have other sources of passive income that can absorb passive losses
- State-specific tax treatment
- Future capital gains exposure and estate planning goals
A tax advisor who is experienced with real estate syndications can help you run tax planning scenarios to determine whether you can benefit from passive losses in the current year and how much suspended loss you may accumulate over time. They can also calculate the impact of depreciation recapture and capital gains taxes at sale.
Think long-term and plan strategically
Real estate syndications can be valuable for building wealth, generating passive income, and diversifying your investment portfolio. They offer meaningful tax benefits—but not necessarily in the first year. For high-income earners, it’s essential to set realistic expectations and approach these investments from a comprehensive ROI perspective rather than seeking short-term tax relief.
The key is to look beyond year-one benefits and focus on long-term performance, cash flow, appreciation and tax-adjusted gains over the life of the investment.If you need help evaluating whether real estate syndications make sense for your situation and understanding how to best integrate them into your broader tax strategy, schedule a free Tax Discovery Session with Cerebral Tax Advisors. We can help you plan for complex tax scenarios and optimize your investment decisions.