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Tax Smart Real Estate Investors Podcast
MLRE: K-1s, Deadlines, and Tax Extensions: How Tax Season Is Hurting Your Long Game
00:22:14
In this episode, we’re breaking down one of the b…
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- [00:02]
A
Welcome to the Major League Real Estate Podcast. A podcast for large scale real estate portfolios. My name is Nathan Sosa and I'm your host. Together with my co host, Tom Castelli, we talk about tax and legal strategies and we bring on operators of large portfolios for in depth discussions on how they grow their business and this tax strategies behind what they do. We hope you enjoy.
- [00:23]
B
Hey everyone.
- [00:24]
A
Welcome to another episode of the Major League Real Estate podcast. I'm of course joined by Tom the today and Tom it is. Post 415 deadline, everyone has been grinding away, everyone has been short on sleep, but we have all made it and we have all filed our tax returns. Right, Tom?
- [00:39]
B
Nope, of course not. You mean people file tax returns for 415 that actually exists?
- [00:46]
A
I'm one of them, Tom. I don't know if you are, but I'm also one of them. I have not filed my tax return yet. I filed a nice extension.
- [00:52]
B
I've been filing extensions since at least 20, 2014 or 15. I'd have to go back and check, but it's definitely been quite a while.
- [01:02]
A
Right. It's like, and like. So look, if you're a gp, you've got multiple funds and maybe you didn't get everything filed on time. Not everything's filed by the 15th for all your investors. Just communicate with them that there's lots and lots of people out there. The biggest clients that we work with all file extensions. Very few of them actually file on time. And so it's totally normal to not be able to hit the March 15 deadline. It's totally normal to. Let's not hit the April 15 deadline. Right. They're all kind of arbitrary ultimately.
- [01:28]
B
Yeah, no, no, they are. Like the filing deadline is just the, basically the deadline you have to pay your taxes.
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A
Right.
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B
At the end of the day, the IRS gives you extensions to follow your tax returns beyond the deadline. Right. So normally for individuals can be 4:15 to file your taxes. For partnerships, which a lot of syndicates and funds are, are in, that's 315. Now you can absolutely extend those returns beyond that. Nothing wrong with extensions. Perfectly normal. In fact, it's very common within the real estate space for people to file extensions. So if you file your extension, you're going to have until 9:15 if you're a partnership, 9:15, 2026, for example, for 2025 returns and 10:15 for individual tax returns. You know, talking about the 2025 tax year here.
- [02:06]
A
Yep. And so what we've already started talking about that. We're going to talk about Today is just talking about why extensions are normal, what you can be doing post. Right now we're getting into the summer timeframe. This is actually the best time in the world to work on your taxes, talk about what you can do, how, how you can be more effective working with your CPA and accounting, just like in talking with your investors. And also just some lessons that we saw as we went through the season.
- [02:27]
B
Right.
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A
So we're talking about those and some other moves that you can make as you're going into this year. So we'll go through all of that. Real estate syndication tax is confusing to you. Well, that's why hopefully you listen to the podcast today. Also, you should go to our website, www.the realestatecpa.com and you'll be able to get access to the Ultimate Guide to Real Estate Syndicators and Sponsors, which breaks down everything from preferred returns, depreciation strategies, whether you're a GP or an lp, void costly mistakes and maximize your returns, download the complete guide free and get the tax credit you need to succeed. And so, Tom, okay, I think we hammered that extensions are pretty normal, but maybe we should say it one more time, that extensions are not a big deal. Specifically, Tom. So for example, everyone wants to rush their K1s to their investors so that they can file on time, right? Everybody wants to file by 4:15, get that tax benefit, right? I literally just saw a K1 get pushed out two days later. Not two days later, Tom. They already had a change for the K1. That's an example of when everyone's working too fast to hit unrealistic deadlines. You're not going to be doing things accurate. It just makes the most sense in my opinion, if you've got complicated, especially year one types of information, to file that extension and push out the deadline. Don't you agree, Tom?
- [03:40]
B
Yeah, yeah, no, I completely hear what you're saying. What happens is people rush, everybody rushes to get their, their partnership returns in the K1 cent out the door by 3:15 so that their investors have it by 4:15 to file their individual returns. But in that haste, to your point, they short, people shortcut things. All the information is not readily available and mistakes are made. And those mistakes sometimes lead to amendments. Those amendments have to issue new K1s. And if your partners have already filed their tax return with the original K1 you gave them, they might have to go back now and amend their return, which now complicates their situation, which may cause them to incur additional fees with their cpa. Or whatever the case may be. In addition to hassle, it just looks very sloppy and disorganized and can easily cause you to start eroding trust with your investor base. I think, you know, the reason why a lot of people, a lot of syndicators want to get this out on time is because they're often raising capital from people who maybe never invested in a limited partnership before. Right. And they're used to having their brokerage statements delivered to them by, you know, the 31st of January, they're able to load everything up on their tax return or send it off to their CPA and get their returns filed in short, their personal, their 1040s filed in short order. So I think this is, it comes down to being an education issue for your limited partner investors who've never experienced this before. You just let them know up front, hey, look, this is completely normal to file an extension. It's very routine and just educate them a little bit on it. I know you're not a tax professional if you're out there being a syndicator, but just kind of giving the knowledge, hey, this is what to expect. You're probably going to get your K1 late, you know, after the 315 deadline or after whatever deadline. And you know what? This is what this means, and here's what this typically means for people and then point them back to their CPA to have a conversation with their CPA and what that means for them. Because at the end of the day, there's nothing wrong with filing extensions. I think that a lot of inexperienced LPs who've never been in this world before, they're just so used to being able to file very quickly because the world of big box brokerage houses and the requirements and the regulations around there require them to get their 1099 out to you ASAP. And it's just a little bit of an adjustment. And yeah, bottom line is I'll get off my little soapbox here. Nothing wrong with extensions. And when you're investing in the world of syndicates and funds as a limited partner, you know, it's something, it comes with the territory. And like I said, I made my first limited partnership investment, I believe, in 2015, if I'm not mistaken. And since that point, I have been filing my extensions every single year. And knock on wood, I never got audited. And if I did ever get audited, it wouldn't be because of the extension itself. It would have been something else that within my situation that got flagged by the irs.
- [06:14]
A
Yeah, Tom, You're. I could not have said it better. That's 100% right in the way that people should be approaching it now. I think we can maybe potentially arm our syndicators with some ways they can help out their LP folks. Right? So I guess let's talk about this, like kind of just like tax things. They can then give to their LPs as like being the syndicator sponsor and say, hey guys, you don't have to sweat as much filing by this deadline. So I think one thing that we can talk about is what happens if some people get really answers. Go, I'm just going to file. I'm just going to file without the K1. And I'm just going to go and take care of it right now. And it's like, what are the consequences there? Right, Tom? So what I'll say first is if it's a real estate partnership and you are an LP without real estate professional status, without anything special, guess what? You do not have to file with that K1. Now what does that mean? What that basically means is that you have a passive loss carryover that you should file with your return. I highly recommend filing with your return and waiting if you just can't. Right? You got a fat refund waiting for you at the end, right. You over withheld on your W2 or whatever. It winds up being you paid in too much. You really want that cash? Sure. You can file right now and it just makes sure that you update that carryover loss because otherwise it's not going to get tracked in the software. Because that's like half the point is like you report it and get it dropped in because it doesn't actually affect your tax. Now if you do that and then it does affect your tax, okay, well, now you're forced to do an amended tax return. And why do we not want to do amended tax returns?
- [07:40]
B
We typically do not want to do an amended tax return. And before I say what I'm about to say, it doesn't mean you never want to do an amended tax return. Sometimes there's strategic reasons to do it where the benefits outweigh the cons or the pros outweigh the cons. But typically speaking, you want to avoid, when possible, filing an amended return because typically an IRS agent is going to have to review that manually. That means instead of a computer simply looking at your return and running its routine checks, now you have somebody with a microscope. And I'm being a little exaggerating here, with a magnifying glass looking at your Return and maybe pointing out things that maybe would have never been seen. I'm not saying that you're doing anything wrong. If you're listening. It's just saying you have an extra layer of scrutiny on your tax return that you would not have had before.
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A
Exactly. Hey, we would like to avoid amendments if we can, right? Just because, man, I don't want the IRS looking at my stuff twice, right? I don't need their AI agent and then a human being looking at it, right? When I say a IRS agent, I mean the AI agent, right? I don't need the AI agent looking at it. Then I don't need the human eyes looking at it too. I would like to avoid that if possible. So I'll just be patient and wait and file and extend my tax return just like I normally do. I can do every single year. So just like FYI there. So that's that process. And also if you are trigger happy and maybe you decide to file the partnership tax returns way early, then you find a erroneous thing you got to change normal. You don't get to amend the tax turn like you would a 1040. You actually have to do what's called an administrative adjustment, an aar. And what that is is basically this crazy piece of this crazy piece like in process that you have to go down where basically you have to file K1s for the year you found the error, which would be 2026. And that means you issue those for 2026 and everyone reports it on their 2026 tax return, not their 2025 tax return. So sometimes it can cause people to amend, sometimes it causes way to report stuff in the current year. It just creates a massive mess.
- [09:29]
B
Right?
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A
This is why we say if you have complicated first year type stuff, we say extend because that way your team has the ability to focus on it on the summer and get things done correctly. That's the whole point of this process, right, Tom?
- [09:43]
B
Yep. An ounce of prevention is worth a pound of cure. I would might get that tattooed on myself. I'm not even kidding.
- [09:50]
A
It's worth what you're worth looking at the rest of your day, right?
- [09:53]
B
Like a quote and it's none other by Benjamin Franklin. He's on the hundred dollar bill. And obviously he's much more important to the US than that. But the point of the matter is do things right. The first time is often better than trying to correct things after the fact.
- [10:06]
A
Yeah, I agree, Tom. And so, and like look, maybe someone's listening and they've also invested in a Cut in something where the GP has gone completely dark on you.
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B
Right.
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A
That's obviously not a great scenario. Hopefully they have their head over water and they're trying to get these tax returns done for you and they're trying to figure things out. But just know that these things happen. Gp, if you're the one not responding to your investors, highly recommend you do that. Just because like, like Tom mentioned earlier, the trust is incredibly important there. It's like the high, it's the highest piece in that vein. That's the highest piece of this whole, of that whole business. Right, Tom, as you've been in it yourself.
- [10:37]
B
Yeah, no, trust. When you're dealing with investor relations, trust is the utmost importance. I mean that is what's going to allow you to a bring on investors in the first place. They have to trust you. It's what's going to help you gain repeat investors. So you don't have to continually go out and, and try to find new investors for every deal. And it's what's going to make or break your relationship in the marketplace. Right. If somebody invests with you and they trust you, not only are they a gonna, you know, remain a happy investor and potentially reinvest with you again, they're also gonna tell their friends, right? They're tell their friends, hey, you know, I invested with so and so and it was a good experience. And the flip side of that is you don't have trust and they go and tell their friends, hey, I don't trust this person. Right? And now guess what, you're not raising capital from that person either. Probably you're not.
- [11:21]
A
And so Tom, so I think like this is a good time. So now we can pivot away from the extension piece and kind of, kind of talk about like what should you do post season? Right. Post tax season maybe you file all the returns, but this is a good time just to like, like, I'm not saying that like you have to be an expert in tax, but it's a good opportunity just to look over what was prepared on your tax, making sure it was done accurately. Right. Did you apply the cost? Can you see what the cost was done? Are there differences on there? Right. That'd be one example. Go to that depreciation schedule, sometimes called a Form 4562. It all depends how the softwares do this. But you'll scroll down and you'll find this depreciation schedule and, and just double check. Right. Does it somewhat align with your purchase price? Right. If it's, look, I'm telling you, if it's within $5,000, your CPA probably got it right. You know, like, it's like they probably got it right. Just make sure that the cost that you see that things are broken out from that perspective. Also, just FYI, if you still haven't filed and you're asking, wondering why, when did you get that information to the cpa? That's one of the big things too. Did you wrap up your books in February, shoot it over to them by March 15? It's totally realistic and possible that they have a large queue of other clients that got their information earlier. And so, hey, a lot of times CPAs work in first in, first out type basis. You know, it always depends. But that's typically one thing that I think that like, hey, if you can get your financials wrapped up earlier, then there's a chance that you might be able to file by that deadline. Right, Tom? But that's just something to think about too, is that like there's as much as an important client as you are, there are other clients to also serve.
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B
Yeah, yeah. Most CPA firms are not serving just a single client. And at the end of the day, the more organized your information is, the more streamlined you can get that information, information to your cpa, the more likely your returns will be filed sooner rather than later. Unless you have some other explicit agreement with that CPA firm to prioritize your
- [13:02]
A
work a hundred percent. And so double check that stuff. You know, I just like, it's good to just do an audit and just a double glance at all these types of things. So just kind of like go through the process, see, hey, and then ask questions. Right. Don't demand or argue, but just it's good to ask questions. CPAs love to educate. Right? Like we love to educate and answer your questions. We love knowing that you care about your tax work. Right. To be frank with you, it's good for us to see that you care because that means we can strategically partner with you. So that's just some postseason book audit stuff. Lessons from the filing season. Tom, how many times have you seen or heard someone say, oh, I got this K1, but I can't take the bonus depreciation. Right. How many times have you seen that?
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B
It's the age old tale that has been around since the dawn of my career and it's still going to be around probably 10 years from now, I'm sure. Yeah, we hear this all the time, right? Everybody hears about the benefits of bonus depreciation, how powerful can be to offset W2 and business income. And not everybody always gets the full story that as a limited partner you're going to be typically a passive investor. And what does that mean? That means the losses that are passed through to you as a result of bonus depreciation will typically not be able to offset your W2 or your other business income. Unless you're also a real estate professional. You can group your rentals in with your LP interest, which is a whole nother story. I'm sure we'll touch on another time. But the point is for most limited partner investors, your loss can be passive and going to only be able to offset other passive income or gains from the sale. Passive activities like other syndicates that you're involved in. So I think there's, it's a lot of people are shocked to hear that. Sometimes it's just, you know, sometimes the sponsor sometimes actually erroneously communicating that we've seen that actually decrease a bit. At least I've seen that decrease a bit over the last number of years, but that could still happen or it's just general misunderstanding, the task code. So just note that if you're an lp, losses for you most likely going to be passive.
- [14:52]
A
Right? And so like yeah, so like educating the GPS in this example, saying, hey, that's how you communicate to your investors, letting them know, look, you're not going to be getting these depreciation losses year one, technically. Now what you are getting is cash flow back to you for your investment that is tax free. Right? That's the big swing. That's the big swing. Inability to take advantage of here is the fact that that exists. Right. So that's one thing for the operators to realize, I think another thing to like. Tom, I actually just talked about this with two, with a, with a fund owner yesterday was. So in some funds, sometimes they get, they get large like right. So they raise capital and then they go through the construction process. Right. And then of course during the construction process they can't use the debt. Like they have to stick the debt into a high yield savings account because there's no way, there's nothing to deploy into. Right. What does that high yield saving count
- [15:40]
B
wind up generating less than 4% interest? Maybe less than.
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A
Yes, exactly. However, that's taxable for them. So then that winds up being taxable to the LPs. Right. So that's the thing. And they can't use depreciation against that. Right. But this is like, it's a big rabbit hole I think. But I think it's important for gps to realize this, to make sure that this is being done correctly. There's the interest tracing rule, right, Tom?
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B
Interest tracing, it's when you're tracing the interest of the debt back to its. Excuse me, the interest is going to be categorized based on the uses of that debt.
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A
Right? And so if it's stuck into an investment account, it becomes. It's no longer business interest, now it's investment interest. And actually what that means now is that like if you have investment income, right, Invest. You have that interest income at the top or other investment income potentially. And then you get this piece and generate. That gets generated. So you're going to have two types of interest now. You're going to have investment interest and you're going to have business interest on the K1s. Why does that matter? That matters because now you can use the investment interest expense on your Form 4952 to offset the interest expense above. Right. It's an additional filing process, a little bit of a rabbit hole, but it can create some tax savings. Okay. Sometimes there's a lot of interest expense that gets kicked out because you got a bunch of proceeds sitting in there. And that's why they want to shell that out to everybody. Right? That's the whole point. And so just another item you can use to utilize as a GP to help everybody. So you always want to make sure you got two types of interest expense on there. If you've done something like that this year, right. Just FYI would look for that. I think it's line 13. But basically that's something to always think about again, so just some planning moves to think about right? As you're going into this next year, if you've got new funds spinning up, just making sure that your operating agreements get read over by a tax cpa, whether you're a big syndicator, a small syndicator, that's just something that I typically see. Tom, what have you seen in some operating agreements or anything that you've seen previously that kind of like where people like didn't miss this or things people should take into consideration?
- [17:35]
B
I think the biggest thing, just overarching, is the mismatch in what people think is in the operating agreement and what is actually in the operating agreement? You have a conversation with a potential sponsor or you have a conversation with a potential client and they're like, oh, we're going to be doing this and this and that and the third. Okay, that sounds great. Fantastic. That's awesome. Then you go take a look at the operating agreement. And it says something totally different. I think overarching. That's probably the biggest thing where you have maybe one part of the agreement says one thing and another part of the agreement says another thing.
- [18:02]
A
Right.
- [18:03]
B
That I've seen that before too. So, you know, I think it's just really important for people out there who are putting these agreements together. These aren't just, you know, pieces of paper people assigning. These are governing documents of the partnership that you're entering into. And they sometimes have consequences. And you just want to make sure that your intended outcomes you have for you, your limited partners, your general partnership group are reflected actually in these agreements and not just, you know, what you think it. What do you think is going on? Right. You want to make sure that the reality, what you think is going on and what is on the paper actually align. Right?
- [18:38]
A
Right. No 100%. Tom, you're spot on. Right. It's like a lot of times people have allocations. They have allocations in one section, then liquidations in the other section, and they don't align. They don't say the same thing, actually. They seem totally unaligned. And that means operating agreement is busted at that point in time. Right. And that just means someone's got to go in and fix it because it doesn't make sense anymore. It doesn't align with what we call 704B. So that's something GP is to always focus on as we're going into this year, as you're spinning up new funds. Something to think about. Right. Have someone, you got the summertime CPAs are, I don't say slower. We're definitely not, but they have more opportunity to help you out with that type of stuff. So that's definitely an opportunity check out. Check us out in the show notes. Right. Click the link and you can schedule a call with us. And we'd be more than happy to run your one through operating agreement with you. But it's also just another opportunity to do a mid year check in with your cpa. Talk about, you know, did you utilize partial asset dispositions? Right. That's another thing you can do on your depreciation schedule is double check and see. Hey, have I disposed of anything in this commercial strip mall that I own? Right. If you have tenant improvements that you fund on a, on a regular basis and anyone move out, that's absolutely an opportunity you can do on a prior tax return or you might have to do on 2026. Now if we filed already. Right. But that's just stuff like that. So I Again, going back to the top of the episode, the extension is super helpful in this point. Why we don't want to speed along these filings. Anything else you can think of, Tom, Anything else to add here?
- [19:56]
B
Yeah, I mean for planning moves. I mean, what I would say, planning wise, get with your CPA and make sure that you guys are on the same page of what you guys are doing and making sure you're not missing any critical details or missing any opportunities on behalf of yourself or your investors to optimize your tax situation. Right. And that you have a game plan in place. I think that's the biggest thing.
- [20:16]
A
Yep. No, I totally agree, Tom. So again guys, if you want someone to review your tax return with you, they'll double check that. We might have some cool features coming out with that on the website. Not too shortly, so stay tuned for that. But do that check our website also. Just click the link schedule discovery. Call with us, Tom, and I'd be more than happy to go over the operating agreement with you.
- [20:33]
B
Yeah, absolutely. So if you're out there, if you're a single asset syndicator or you're doing multiple asset syndications, or you are a fund manager, you're thinking about starting a fund and move transitioning from single asset syndications over into a fund structure and you're looking for CPA who could help level up with you. We have an entire division of our firm here at Hull CPA called the Private Equity Division that works exclusively with syndicates, funds and other large scale operators. So we'd love to have a conversation about how we can help you make sure that your operating agreements, your PMs, everything's optimized correctly, that you're filing your taxes the right way, everything is being done above board and everything is nice and tight so that you can not only make sure this area of your business being taken care of, but you could instill trust in your investors that everything is being buttoned up and that ultimately at the end of the day, you could retain your investors, get more investment capital and you know, just Streamline your life 100%.
- [21:22]
A
Tom. Alright everyone, this has been another episode of the Major League Real Estate Podcast and we will see you next week. Thanks for listening to the Major League Real Estate Podcast. There are three ways you can connect with us. If you're interested in getting email updates on upcoming shows, go to www.thererealestatecpa.com and subscribe there. If you'd like to explore a tax and accounting relationship with our CPA firm, you can go to www.therealcpa.com mlre and fill out a web form to get started. And if you'd like to connect with Matt or I on social media, you find us on LinkedIn or Twitter. Just search Nathan Sosa, CPA. Matt Hamilton, CPA, and shoot us a request. We'd love to connect. See you guys next time.