The real estate syndicate is a pooling of resources of many investors to buy a building or long-term lease-hold.
Syndicate's Paper Loss - More Income to You
Sometimes you see that in the first year or even in the first few years the syndicate, while making its regular yearly distributions, sustains a loss on paper. As a result you won't have to pay any income taxes on your distribution. In fact for tax purposes you are deemed to have sustained a loss which you may use to offset other income.
The depreciation reserve during the first few years is greater than the total of the payments to the investors and the sum applied to the reduction of the mortgage. This means additional income to you to the extent that you save income taxes because of the paper loss.
Naturally it won't last. Under the declining balance method the depreciation allowance will decrease and the tax bite will increase, as times goes by.
Tax Shelter and Capital Gains Taxes
Take a look at the following excerpts from recent syndicate brochures. (The names of the accountants whose opinions are quoted are omitted.)
Accountant estimates that the first five years an average of 63% of the annual cash distributions will not be reportable for federal income tax purposes. For the first 10 years, the amount not reportable will average about 53% per year.
The accountants have estimated that an average of approximately 72% of the distribution will not be reportable as taxable income for the first five years.
Other brochures mention the word tax shelter. Know the language. No one will say that you do not have to pay any taxes at all. They say that on a portion of your distribution you do not have to pay income taxes. They leave it to your imagination to figure out that you may have to pay capital gains taxes. When you read the words tax shelter, bear in mind that you have to pay taxes when you leave that shelter.
This is how it works. You buy a syndicate participation for $5,000. Every year for ten years you receive $500, assuming that the distribution amounts to 10%. At the end of 10 years, you will have received $5,000. Let us assume that 60% of the moneys received were not reportable for federal income taxes. At the end of 10 years, you want to sell your unit. You find someone who will pay you $5,000.
Uncle Sam waited patiently for 10 years. Yet ultimately he collected a tax. Nevertheless, the tax shelter does something for you. You do get some very substantial benefits. First, for 10 years you did not pay any taxes on a large portion of your yearly distributions. During these 10 years you had the use of the money which you would have had to pay out in taxes.
At the end of 10 years, you do pay a capital gains tax but only at half the rates of your ordinary income tax bill and in no case more than 25%, even if you are in the highest tax bracket. So if you are in the 40% income tax bracket, your capital gains tax would be only 20%. If you are in the 30% income tax bracket, your capital gains tax will be only 15%.
Tax shelter does not mean that you won't have to pay taxes at all. It means that part of the taxes are deferred for a long period, usually until you sell your investment. It also means that you will pay taxes at half your ordinary income tax rates - a substantial saving.
As you can see, there are some very significant benefits from this type of investment.
