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Asset Location: Where should RE private equity go?

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  • Asset Location: Where should RE private equity go?

    I would like to gradually start investing in equity syndications and RE funds. I'm still trying to get my mind around the tax implications and how tax efficient these assets are. I searched around the internet to see if anyone has written about the comparative tax efficiency of stocks and real estate holdings and couldn't find anything helpful, so I wanted to see if anyone here had input on where RE private offerings fit in the relative order of asset location.

    I've already invested some money in hard money lending funds. Those only produce ordinary income, so clearly they make the most sense to put in a tax-deferred account.

    Equity offerings have the advantage of depreciation. However, any income not sheltered by depreciation would still be ordinary income. So, it seems like it would take an exceptional amount of depreciation to reduce that ordinary income to the point that the taxes on your real estate income would be lower than the taxes you would pay on whatever index funds you might own.

    In a practical sense, the question for me is, if I'm going to invest in these offerings, should I do so in my self-directed 401k, or should I do so in a taxable account? If I bought them in my self-directed 401k, I'd sell off some ETF's in my self-directed 401k (likely large cap value and small cap international) and repurchase them in my taxable account.

    Looking for insight from posters with more knowledge and experience.

  • #2
    Most would tell you that to get the maximum benefit from depreciation the real estate equity is best held in the taxable rather than non taxable side. Usually the depreciation out strips the income generated and you end up with a net negative on the K-1 supplied by the syndicator. Even if you end up with some net income the cash flow is usually much higher than the taxable income.