The Wealth Elevator Syndication eCourse

Tax law update (2026): the 2025 tax law restored a permanent 100% first-year (“bonus”) depreciation deduction for qualified property acquired after January 19, 2025. See the IRS notice on the additional first-year depreciation deduction. How much of a K-1 loss you can use depends on your other passive income and your situation, so check with your CPA.

Wait, what about 1031 Exchanges?

Why Sophisticated Real Esate Investors Don’t Do 1031s

Below is a summary of 1031s also known as a like kind exchange. But with the amount of bonus depreciation in deals going to LPs to reduce tax liability, I don’t know why people do 1031s???

In 2018, I sold 7 SFHs and had 200k of capital gains. Instead of using the 1031 exchange rule to find an exchange property each time I sold a SFH, I just offset it with 200k of passive losses that I built up by going into syndications.

Under Section 1031 of the Internal Revenue Code, the 1031 exchange is a method of deferring the taxes due on the capital gains of a property. In the exchange period, you have 45 days to identify a potential replacement property and have 180 days to close on said property(s).

It’s a way of kicking the can down the road with taxes. I would use the 1031 exchange rule in the last case resort since it doesn’t remove your tax liability, you have to pay taxes at some point unless you are going to take it to the grave with you and get the step up basis (so there is an exception if you are pretty sure you are on your last 5-10 years of life) which is not very practical due to the following.

1) The 45 days given in the 1031 exchange process to find a potential replacement property is almost impossible to execute. To be able to line up a deal that is “hot”. Experienced real estate investors spend an average of 18 months to find that elusive first apartment. Now, if you are buying lukewarm deals… then be my guest. But in this seller’s market, I think it’s a way to lose everything.

2) Most investors that I work with are high net worth and able to cashflow income minus expenses over $30k a year and have over $50k of liquidity on hand. I believe that most people, unless they are talented at being an elite investor, should just be an LP role in a syndication due to the scalability and being able to spread their capital across different leads, business plans, asset classes, and geographical locations. That said, a successful 1031 exchange will not allow you to go from real property to an LLC (ownership in a syndication). Although you could do what is called a Tenant-In-Common (TIC) arrangement, where an investor has 1031 exchange funds and wants to parlay that money into a syndication. It’s possible, but from the syndicator’s perspective a lot of unneeded work when you can just raise the funds the traditional way. Caveat: if you are bringing in a huge amount of money, say 50% of the raise, then that might tip the scales in your favor). We would do a TIC with you, but you would need to bring in more than 1-2Mfor it to make it worth the administrative burden.

Again, when we sell the asset in 5-10 years anyway, you will be in the same but worse predicament. Take advantage of bonus depreciation now.

There is a reverse exchange and other more exotic exchanges, but I personally am not sold on the concept when the Internal Revenue Service (IRS) comes knocking. I am not a tax professional, but I feel it is tax evasion.

As an LP investor in syndication deals large enough to pay a guy 5-10K, we do cost segregations to generate bonus depreciation, which can offset part of the gain from exiting the last deal, depending on your situation. In my view, that makes a 1031 exchange less necessary for many LPs, but ask your CPA how it applies to you.

The order in which suspended losses are deducted is:

1. To first offset depreciation recapture and gain from the activity that was sold.
2. If the suspended losses are in excess of the total gain, the remaining suspended losses will then offset ordinary income.
3. If the suspended losses do not offset 100% of the gain from the activity that was sold, you may use suspended losses from other rental activities to offset the remainder of the gain from the sale.

See the full article and my 1031 story here.

1031 Exchange in Syndications

In summary… 1031 into Syndications is possible via a Tenant-In-Common (TIC) structure, but it is a bit of a pain legally; therefore, we will only do it if an investor is bringing in 2-3M+ of equity.

A 1031 exchange is a major tax benefit associated with real estate ownership, which allows the deferral of capital gains by exchanging the gain into a like-kind property upon sale rather than receiving all the sale proceeds in taxable cash. Combining a 1031 exchange with a sponsored investment allows a 1031 exchange investor to essentially become a limited partner investor in a professionally managed investment vehicle. The investor performing the 1031 exchange into the venture can also 1031 exchange out their interest upon sale. This is advantageous since typical limited partners in a real estate investment are unable to 1031 exchange their individual ownership interest upon sale and must rely on a deal-level 1031 exchange if they wish to defer capital gains taxes upon sale. The reason for this is that limited partners technically do not own real estate. Instead, they own a partnership interest in a real estate venture, which is ineligible for a 1031 exchange, since 1031 exchanges must be like-kind exchanges of real property.

1031 exchanges in joint ventures or syndications are structured using a tenancy in common structure, which allows the 1031 investor to take direct title to the property, which is one of the key requirements of a legitimate 1031 exchange. A complication of the TIC structure within a management partnership is that the “tenants” in common have joint and several ownership of the property with equal control. However, in a syndication/joint venture, the sponsor is supposed to have decision-making control (this is important for the lender as well since they are lending based on the sponsor’s control and ability to oversee the success of the deal). Typical joint venture economics and control rights can be outlined through a side-letter or through other means to make the 1031 fit into a traditional syndication/joint venture structure.

Not all sponsors offer their investors the opportunity to 1031 exchange, and oftentimes those who are more desperate for investors will bend over backwards for this cumbersome arrangement.

Our team has experience structuring 1031 exchanges in our investments ,both with agency lenders, bridge debt, and banks. The greatest source of complexity comes from the lender requirements when it comes to the TIC structure, especially Fannie Mae and Freddie Mac. Because the 1031 TIC investor is a direct owner of the property, they are technically a borrower in the eyes of the lender and therefore must be underwritten. Being underwritten by a lender includes a credit check, background check, disclosure of personal financial statement, schedule of real estate owned, and business resume. This does not mean the 1031 investor has to be a guarantor on the loan, but sometimes lenders ask for limited guarantees.

Another example: Assume you invest $100,000 in a syndication and the cost segregation yields $20,000 of depreciation.  You hold the asset for five years, and it is sold for $150,000.  You have $50,000 of capital gain and $20,000 of depreciation recapture.  Assuming your capital gains tax rate is 20% and you made no further investment, you would owe tax of $10,000 on the gain and $5,000 on the recapture.

Now, assume you took the $150,000 and invested it in a new syndication and got the same 20% cost seg, so $30,000 of depreciation.  The new depreciation would first offset the $20,000 of recapture, then the remaining $10,000 would offset some of the capital gain from the previous sale, leaving you with $40,000 of gain.  You would pay 20% tax on the $40,00,0 and the tax owed would be $8,000 rather than the original $15,000.  If you have other passive losses that you have been carrying from other investments, those could be used to further defer and reduce the tax.

This is detailed in IRC Sec. 469(g)(1)(A). And if you want to have a wild Wednesday night, here’s an article that explains it in-depth:
https://www.thetaxadviser.com/issues/2008/may/disposingofanactivitytoreleasesuspendedpassivelosses.html

A discussion on inflation…

In 2022, the U.S. Labor Department data suggested that the annual inflation rate in the US accelerated to 9.1% in June of 2022, the highest since November 1981.

Inflation is a volatile variable when it comes to managing your portfolio. The effects of inflation can devastate your assets, as we have seen in the wake of a downturned economy, war, political unrest, a disturbance in resource availability, or a chilling response to a surging global pandemic.

Inflation means that your money doesn’t go as far as it used to – you are basically losing money (buying power). This is true whether you like it or not, and while nobody likes losing money, some people always seem to profit from inflation. 

Multifamily real estate can be an excellent hedge against inflation. To understand why it’s essential to know how inflation works and how it affects the value of money. And when you know those things, you may discover that multifamily real estate can help you protect yourself from inflation’s adverse effects—and even profit from it.

The four ways we make money with real estate are the following: 1) cashflow, 2) appreciation, 3) principal paydown, and 4) tax benefits. Cash flow is the current and ongoing payments to the investor from rents. It is also referred to as yield. In addition to yield, there is equity growth from the appreciation of the property and paying down the mortgage each month. This equity component is realized upon liquidation of an apartment building—we’ll look at an example below to see why this makes apartment investments so attractive.

Multifamily real estate has a long track record of beating inflation. Over the last 43 years, multifamily has beaten the inflation rate 37 times. In comparison, the S&P 500 has only beaten inflation 29 times. How can multifamily provide these more stable and consistent inflation-busting returns? Let me run you through three different scenarios: one in which rent growth exceeds CPI, another in which rent growth equals CPI, and a third in which rent growth lags behind CPI.

Our hypothetical apartment investment looks like this:

100–unit property
$10 million valuation
$1 million in gross operating income (GOI)
$500,000 in operating expenses
$500,000 net operating income (NOI)

5% cap rate (steady)
5% inflation rate (CPI)
7% rent growth (case #1)
5% rent growth (case #2)
3% rent growth (case #3)

Case #1 – High Inflation / Higher Rent Growth

When inflation rises, apartment rents tend to rise even more quickly. Since multifamily properties have short lease contracts—typically no longer than one year—they are nimble enough to respond to inflationary pressures and raise their rents in response. This is a real benefit for apartment investors that is not available to other segments of the commercial real estate space. Typically, office, retail, and industrial properties utilize longer-term contracts, making it difficult for them to respond to inflation. As a result, the only way for them to achieve higher rent growth than CPI is through the re-leasinof g property at higher rates than those specified in their leases.

In this case, we are assuming a 7% rent growth and a 5% inflation rate.
GOI – $1 million x 7% rent growth = $1,070,000

Expense growth – $500,000 x 5% inflation = $525,000

NOI – $1,070,000 – $525,000 = $545,000

NOI = $545,000

Our NOI increased by $45,000, so it is clear that our net distributable cash flow (yield) to the investors increased. Now let’s use that NOI number to see how much our equity grew.

Value = NOI / Cap rate
$545,000 / 5% = $10,900,000
Value = $10,900,000

So, in this case, our yield increased by $45,000 (from $500,000 to $545,000), and the value of our property increased by $900,000 (from $10 million to $10.9 million). We are not losing money to inflation; both values are increasing equally. Obviously, this is an ideal situation for the investor. But what happens if rent growth does not exceed the rate of inflation? What if they both go up equally?

Case #2: When High Rent Growth Equals/Keeps Up With High Inflation

In this case, both the rate of inflation and rent growth are equal at 5%. Let’s do the math.
GOI – $1 million x 5% rent growth = $1,050,000
Expense growth – $500,000 x 5% inflation = $525,000
NOI – $1,050,000 – $525,000 = $525,000
NOI = $525,000

Value = NOI / Cap rate
$525,000 / 5% = $10,500,000
Value = $10,500,000

Even when rent growth merely keeps up with inflation, the investor still wins (and profits from inflation). An increase in income of 5% equates to a less than $42 increase in rent for each unit per month. The owner’s expenses also went up 5%, costing him or her less than $21 per unit.

The increase in yield is cash in your pocket as well as an increase in the equity value of the property. Everybody wins here.

Case #3: When the Rent Growth Lags behind High Inflation

In the two previous examples, investors benefited from the effects of inflation. But what would happen if rent growth could not keep up with inflation? Would inflation win? Would we be stuck losing money? Let’s redo the math for an inflation rate of 5%, but this time, rent growth lags behind at only 3%.

GOI – $1 million x 3% rent growth = $1,030,000
Expense growth – $500,000 x 5% inflation = $525,000
NOI – $1,030,000 – $525,000 = $505,000
NOI = $505,000

Value = NOI / Cap rate
$505,000 / 5% = $10,100,000
Value = $10,100,000

While it may seem counterintuitive to achieve both higher yields and increased equity, the fact of the matter is that B-grade commercial multifamily real estate has expenses that are around half of the income it generates. So even in the worst-case scenario, this fact helps offset the effects of inflation on apartment investments.

So, is it a Good Time to invest in Real Estate?

• Investing in hard assets of value, such as real estate, protects one against inflation.
• Investing in appreciating assets with positive returns counters the effects of inflation, which can cause negative returns.
• Rates are still very low (We had 17% interest rates in the 80s!).
• Home ownership is declining, leading to increased demand for rental properties.
• Rental growth has increased yearly and is expected to continue through at least the next three years.

In the end of the day, the rich are getting richer because they are in assets like real estate that go up with inflation. The poor and middle class typically do not buy assets that do this, which is why inflation acts insidiously to rob those who need money the most. Politics and morals aside… learn how the system works and do what makes sense for you and your family… and please teach this to the next generation because financial education is really what separates those in net worth more than academic education.