WS1966 Real Estate Tax Tips | Highlights Kelsey Head

Looking to invest in real estate syndications but worried about the tax implications? In this highlight episode, tax expert Kelsey Head tackles your most pressing tax questions, equipping you to confidently navigate the world of K-1s, passive losses, and state filings.

Kelsey emphasizes the importance of reviewing your K-1 forms promptly and thoroughly. She walks you through essential checks, including verifying your name, address, social security number, and tax ID information. Additionally, she highlights the importance of ensuring contributions and distributions match your records.


3 Key Takeaways You'll Learn:

• K-1 Review Essentials: Avoid last-minute scrambling by learning to identify and verify crucial information on your K-1 tax forms.
• Passive Loss Strategies: Understand how passive losses from real estate syndications can be carried forward to offset future capital gains.
• When to Hire a Tax Pro: Know when seeking professional tax guidance is essential for your real estate investments.

Even if you invest outside your resident state, filing state taxes there is crucial. This allows you to utilize any losses against future gains in that state. Stay informed and make smarter investment decisions!

Subscribe to The Real Estate Syndication Show for more insightful episodes on real estate syndication and wealth-building strategies.

VISIT OUR WEBSITE
https://lifebridgecapital.com/

Here are ways you can work with us here at Life Bridge Capital:
⚡️START INVESTING TODAY: If you think that real estate syndication may be right for you, contact us today to learn more about our current investment opportunities: https://lifebridgecapital.com/investwithlbc

⚡️Watch on YouTube: https://www.youtube.com/@TheRealEstateSyndicationShow

📝 JOIN THE DISCUSSION
https://www.facebook.com/groups/realestatesyndication

➡️ FOLLOW US
https://twitter.com/whitney_sewell
https://www.instagram.com/whitneysewell/
https://www.linkedin.com/in/whitney-sewell/

⭐ Be Our Guest!
We are continuously working hard to help our listeners with their journey to real estate syndication. If you think you can add value in any way to our listeners who are in commercial real estate, then we’d love to have you over.
Apply here: https://lifebridgecapital.com/join-our-podcast/

Transcript

Whitney Sewell: This is your daily real estate syndication show. I'm your host, Whitney Sewell. Today, we've packed a number of shows together to give you some highlights. I know you're going to enjoy the show. Thank you for being with us today. Kelsey, welcome. Uh, I'm honored to get this time with you to interview you and really go through some tax questions, right? Things that questions I know I get asked all the time and often I have to say, Hey, uh, I am not the one that question of, right? And so I have to look for obviously people like yourself, right, that are team members of ours, that we partner with, trusted experts like you that have those skill sets. And in your case, it's tax, which we seem to, most of us need help in that world of tax. So happy to get to chat with you today. Welcome. Thank you. Appreciate you having me. Kelsey, well, you know, often I get the question, what to look for on your K-1. What does a K-1, like, why do I need a K-1? How do I read it? What does it mean for me? I, you know, people ask all the time, you know, like, well, you know, it doesn't seem very complicated. However, I don't know how it affects my taxes. Right.

Kelsey Head: And it comes up so often. The number one thing is, and this really goes back to when you initially filled out your investor sheets at the very beginning, when you get that K-1, Is the name right? Is the entity right? Social security, address, EIN, all of the things that are very, very simple. Look at those things first. Make sure that when you filled out your investor sheets to initially sign up for the offering, I'm going to give you a little bit of background on the K-1 program. just exhausting to ourselves to get these K-1s out in a timely fashion, both from the operator side and the accountant side. It's a dual effort. And when those go out, if you will just immediately look to see if the big stuff is right, because ultimately what happens is we'll get to September 14th, and we're to the last day before it can be filed, and we'll have changes still coming in on the partners. And so many of those things can be handled in the first 30 seconds that you open that K-1. So take a look at those things first. The other important items, contributions, of course. If you put in $50,000, make sure that down in the left-hand corner where it says contributions, that left-hand corner is your friend, bottom left. If you look at your contributions, make sure that matches in year one. If you got $10,000 in distributions in that year, make sure it says $10,000 of distributions. You're not expected to know what the net income or loss ultimately is because obviously that goes through a ton of work and calculations, but the high level items of what did I put in? What did I get out? And is my name and social security number and address right? Those are all things that can really, really save a lot of time for just everybody. And then ultimately in a sale year, making sure that that distribution lines up to what you got, because that cash is gonna ultimately help figure your gain. So if it's wrong, for some reason, ultimately, you're going to have a surprise one way or another on your K one for that income. So it's, it's not hard. But if you don't know what it is, then, you know, you don't know what you're looking for. But those are the high level items to take a look at.

Whitney Sewell: Yeah, I know, often, We get people asking questions about, Oh, wait a minute. That's not the entity I wanted on there. Right. Or that's not the, you know, wait a minute. That's what we have. Right. And that's what you filled out on your subscription agreement. Right. When you wanted to invest in the deal. And then it's a process, right. To get that changed or corrected or, you know, and if it's a, in their personal name or if it's in a, the wrong entity, right. They wanted an entity and it's a, it's a process and sometime a legal process, right. To, to get that fixed.

Kelsey Head: Right, and it seems very easy of, well, I had it in, you know, Bob's name and I want it in Bob's LLC just for color, just to change that in the system and redistribute and re-pull all the K1s and print it all again, all of the things that have to, the process on the back end of that. these tax returns now are 3,000 and 4,000 pages. So every time you change for one name, it's a 3,000 page process, you know, back to a file and zipped and sent out. So it's just, it's those things like that, if we can catch them in March and April versus September and October, it saves everybody a lot of time. And again, on the front end, the better you can do, the better off we all are.

Whitney Sewell: Yeah, for sure. It just leaves more room for mistakes long term too, right? That's still in that first document. Because I can see us too, where there's a question about somebody's return, or they even have a question about their K-1. We go back and look at that old subscription agreement, and it's like, oh, yeah, it was in this entity, and oh, wait a minute. They actually changed that, but maybe we didn't see that. You know, it's like, I could not agree with you more. And I think sometimes, too, people, you know, they invest with their personal name and then they get in some of these groups and figure out, well, wait a minute, I should have created an entity to start investing. And I want that in that entity. Well, it's not just as easy as changing the name.

Kelsey Head: Right, right, right. And it can be so long as everyone knows, but it's basically anytime you want to make a change, you should have those changes to the operators and, you know, through your investor portal or however those need to be made, have that done by, you know, the latest January 1st, January 15th of the current year. to where it happens before we start tax returns and before we're off in the midst of doing them, that makes it a lot easier.

Whitney Sewell: Yeah, no doubt about it. Anything else about a K-1, Kelsey, that an LP or passive investor should know about or think through when they receive it or any other questions that maybe you get from LPs?

Kelsey Head: Yeah, it's generally the only other questions are kind of on the, it's always in the sale year of why do I have all this income, it doesn't ever quite register. You know that because you got cash, you're going to have income and the two are always, they think of it more of a well I just got my capital back Well, you did, but you got that capital back because we sold a property and have a gain. So the two always go hand in hand. And again, just having some tax advice somewhere along the way, you know, letting an accountant know if your personal CPA, letting them know, Hey, I sold this property to where it's not a surprise on the backend. And you can get pretty close by following the cash you received.

Whitney Sewell: You know, Kelsey, the K-1s, and it's a process, right? Our team has just, my goodness, I feel like we've been running through the ringer a few years, you know, trying to improve that process. And it's, we're trying to provide better service to our investors, right? Well, many of them are very concerned, right? That if it's, if they can't file by the first deadline, right? And so I just wonder, you know, what are your thoughts behind that concern? right? Should they be concerned if they're filing three or four weeks later, right? Or, you know, if it's even eight weeks, you know, after that deadline or, you know, what are your thoughts behind that?

Kelsey Head: I, I just don't see it as an issue. I know it's always, it's always a thing to, to rush, to get these out by April 1st so that people can file by April 15th. And I do understand if you just have one K-1, And that's the only thing that's holding up your return. That's frustrating. But from an IRS standpoint, I've been at this, this is my 19th tax season. I've never seen any correlation between the two. I know there's some, you know, older school that maybe you got audited more if you filed in late, you know, late September, October. But I just don't think that, you know, May and June filings make any difference to April 15th. Obviously, you want to have your taxes paid in so that you don't have penalties and things, but the extension itself, it doesn't hurt you.

Whitney Sewell: Well, you know, who can actually deduct these real estate losses, right? I think there's, there's confusion there often, uh, who can, who can use those who's who can.

Kelsey Head: That is probably one of the, one of the number one questions I get a lot of times it's new investors. It's their first real estate investment. Um, and this, It doesn't only pertain to real estate, but it's anything that is passive so I give you $50,000 of my money. And then essentially other than checking in to make sure it's going okay and getting my distributions every year. I don't do anything right I, I invest my money for you to put it to work. Then we sell a property and I get, you know, some percentage of that sale, and hopefully that's a gain and we move on. So by nature I'm passive in that investment. So what the IRS says is, you know, nice try. If you have a passive investment, you can always pick up passive income. They're never, you know, worried about that. But you cannot take a passive loss unless you have passive income to offset it. And so what I find the most often is that someone goes out and they read these offerings or they read, you know, blogs or wherever they get their news source, and they see, invest $50,000 and get $35,000 of depreciation expense in year one, you're going to get this big loss and save all these taxes. And that's where everyone stops reading. And what, what really happens is, assuming that's in a bubble, and you just have that one K one, I don't have 10 other investments that I'm not active in that loss. doesn't go anywhere. It sits there, you get to keep it, it's yours, but you can't deduct it in the first year because you're not active. In order to be active, you'd have to have at least 500 hours in any one activity. Looking for investments doesn't count. So truly out there pounding the pavement, part of it, or more than anyone else. So in an LP deal, a normal real estate deal, that's just not going to happen. However, all of that loss carries forward. And so when we were talking earlier of, you know, we had gain on a sale, and so I got distributions of $100,000, but I have $100,000 gain. So I normally have, you know, somewhere in the $30,000 tax range. Instead now, because I was passive, I've got all these old losses. If I hold the property, say three years, year one and two losses are hanging out there. They didn't help me, right? Nothing happened. But now in year three, I sell it and all those old losses collapse down and help me out against that gain. So if you had taken it in the past, then you'd be totally exposed on the gain. But by not taking it and it hangs there, then the two net come together. And that's where you get your benefit. So you you get it, but it doesn't, it's not going to offset your wages from your doctor's office, your wages from, you know, wherever you may work, that passive loss is just not not going to offset that. And I think there's just a lot of confusion around that particular little nuance that we get really excited about the depreciation losses, but don't stop to make sure it all fits into your particular situation.

Whitney Sewell: Yeah, I know, especially early on, I remember being confused about that, especially the more investors I talked to as well, you know, and they have a W-2 and that's what they're hoping for. Right? That's what they're hoping for.

Kelsey Head: Absolutely.

Whitney Sewell: Yeah. Wouldn't we all, right? But it's the, you know, you have to remember, you have to have the passive investment or the passive income, right, to have the passive losses. But even the active piece, you mentioned to be considered active 500 hours, and that's pretty significant amount of hours.

Kelsey Head: Right, right. It's a lot. And You can get there a lot easier if, say, you own a rental property, so you buy a couple of duplexes. Then it's a little easier to get to that active participation, and you maybe take some of those losses there. But they're going to find a way to take them away if they can like that's the way I always try to tell everyone and think about it is if it if it sounds too good or too easy, it probably is. And so just always keep in mind that, you know, if you're if you're putting up 50 grand. that you understand that there's there's kind of a deferred portion of that. So you're, you're going to get your investment back, and you're going to get to take losses or offset that game, but it might not be a, you know, right up front gratification on that on that tax savings.

Whitney Sewell: Yeah. So if you're, if you are, and then maybe this is too specific, but but you know, if you're a W two employer, your doctor or whatever, it may be beneficial to own a duplex. So you have some active hours. Is that in real estate?

Kelsey Head: It helps a little bit, but it still won't get you there with your LP investments. It would just maybe get you some losses somewhere else. It might help you out. But these LP investments, for the most part, if you're a W-2 employee, you're just not going to get there. So it's more about where it comes into play is, say I'm in a year where I had my first LP investment, and now we're into that sale year. And I don't have enough losses to offset that gain and I've got a bunch of ordinary income and sitting out there and I'm exposed. That's when you can time it and maybe go into another investment. and because you have passive income from a sale, now you might get to offset with some of those new losses. So you start into a pattern, if you're willing to do it, you start into a pattern of kind of chasing deals is what you end up with, to where if I know I've got a big exposure of tax in this year, well now's a good time to go invest in another property, get some of those losses to help offset, you're kind of pushing it down the road. But as long as you're willing and able to put up the money, that's how you can kind of use those losses.

Whitney Sewell: Wow. Any other tips or thoughts around that or the way people have done that or, or just any confusion around that from LPs?

Kelsey Head: Right. I mean, I think the big thing now is the bang has gone down a little bit because bonus depreciation is phasing down. So up through 2022, we were taking 100% bonus doing cost segregation studies. It was easier getting a good 30% of every property as 100% bonus and deducting it. 2023 comes along, that's 80%. Now we've started 2024, we're down to 60. Now, we're all patiently or impatiently waiting for something to happen and that get changed again. But right now we're at 60%. And so you're really gonna have to start to be careful. I think you're gonna see people maybe being a little more deliberate about when they invest and how they invest. knowing that the dollars are a little smaller now. Again, it's all timing, right? You get it. It's just a matter of when.

Whitney Sewell: As many of our investors, even as they grow in their investing, right, it was different when maybe they just had a salary, you know, income or W-2, and then they make their first passive investment and they make a few more. Oftentimes, you know, I get questions like, well, Whitney, when did you hire a personal accountant, right? Or somebody to do your taxes versus you're doing your own thing. And I just want you to be able to answer that question for them because I'm sure you get the same question often.

Kelsey Head: I do, and I think every situation is a little bit different. If you have a W-2 and a 1099 and a couple of kids or deductions, then going online and doing your own taxes, that's exactly what I would do. When you start to invest and you're going to get K-1s, if any of the things surrounding passive losses or real estate or what happens when you sell, if any of those things are new and confusing, that's probably a sign to talk to someone and get some help. The other thing that I've noticed over the years is the investors that email investor relations a lot. They have a lot of questions or about how these things come up or how they've come on to their K-1. If you're catching yourself doing that a lot, that probably means you need to go get someone. The reason I say that is not because we ever mind answering questions, but we always have this little bit of caution that we're not giving tax advice out without knowing an entire situation because there's always an if or an or or an and that you may not know about. So we have to be a little bit careful too. But I will tell you that if people come to me, LPs, you know, just anyone in general, if they come to me, have me look at a tax return, And I look and I say, hey, there's just one K-1 and you may have two questions a year. I'm more than happy to answer those two questions rather than charge them a bunch for a tax return that they could otherwise just get online and do themselves. And so I would say, reach out to someone, get some help, but at the same time, don't pay a whole bunch of money if it's just not quite that time yet.

Whitney Sewell: Yeah, it's a, I know for myself, it was a growing process, right? You know, as my taxes became much more complicated, you know, even early, you know, in the real estate investing, it was just obvious I needed some help. I mean, I just needed more questions. Like you said, I, you know, more and more questions as, as I'm doing more things outside of a salaried position. And I didn't know the answers and it was pretty quick. I'm like, okay, I need, I need somebody else to do this for me.

Kelsey Head: Right. And I think, I think the other one that the triggers that immediately is, you know, if you're a Texas resident but you invest in a Colorado property, or, you know, the other way around anytime you're outside your own state and comfort zone. that gets a little bit tricky. Generally it's going to be time to check in with a professional and kind of make sure that you're going about it the right way or you don't miss something and get a bunch of notices or deduct something you shouldn't and land with an audit because that's ultimately going to cost you three times what it was to just pay someone in the first place.

Whitney Sewell: Yeah, you know, and I get that question as well, often around, should I be filing taxes in other states, since I'm investing in properties in those other states? What, how would you respond?

Kelsey Head: And the answer is generally always. And the reason is, you know, again, I'm a Texas resident, but I have invested in a property in Colorado. If I don't file in those the first year when there's a loss, Then when I sell that property and I now owe tax in the state of Colorado, Colorado doesn't know anything about those losses that happened two years ago. So when we talk about, you know, getting to take losses against potentially against gain in a later year, that falls out for those state returns if you never filed. So even though it may cost you a little more, you know, if you have a $20,000 Colorado loss, that's now going to save you two, $3,000 of tax and you paid $500 for a tax return while it was worth it.

Whitney Sewell: How can they learn more about you?

Kelsey Head: Right. If you ever have a question or want to reach out, you can either email me and maybe you can add my email and my contact information. The easiest way to get a hold of me is email. I'll get back to you as soon as I can. We are about to be super busy, so I may be a little behind the next couple of months, but we are ramping up and hiring up, and so I'm always glad to try to help field questions and help out wherever I can.

Whitney Sewell: Thank you for being with us again today. I hope that you have learned a lot from the show. Don't forget to like and subscribe. I hope you're telling your friends about the real estate syndication show and how they can also build wealth in real estate. You can also go to lifebridgecapital.com and start investing today.