Tax Time 2023 for Syndication Investors

It's that time of year again... preparing to file your tax return! OK, so it's not really very exciting. But we pause all the same to reflect on what that means for investors in private syndications.

There are special concerns that private syndicators have when it comes to taxation. While there are many tax advantages associated with certain private investments, such as multifamily syndication investments, there are also considerations on the downside. We covered these topics last year in a post in April entitled "Tax Time!" with real-time updates from some of the syndicators we were invested with at that time.

The principal downside is the timing of the K-1 delivery from many syndicators/operators. In our experience of investing in private syndications, each year some percentage of the K-1s due come after the deadline set by the IRS (March 15) and many of them even come well after the deadline for you to file your tax return (April 15).

So investing in syndications probably means filing for an extension on your personal federal tax return each year.

Our family is invested in a few dozen syndications and related funds. The purpose of this site and blog are to offer reports and real-time data to those who are thinking about investing in syndications. One difference this year (2023) compared to last year (2022) is that fewer syndicators are writing to us to complain about labor shortages at their accounting/CPA firms.

In the spirit of accountability, we offer "shout-outs" especially on the upside when syndicators do things well. We offer two particular 2023 shout-outs for timeliness of tax documentation on the fund side to Fundrise and on the syndications side to Cape Sierra Capital. Both hit 100% timeliness on the tax documentation in 2023 for our investments. No other syndicator/operator we have worked with is yet at 100% (and we are typing this in early April, after the IRS deadline for this documentation of March 15). We note that in last year's Tax Time post, we similarly called out Cape Sierra Capital as the only firm to get everything back to us on time.

Why might this matter? Well, two reasons at least. (1) For those who WISH to file their federal tax return on time by April 15 for the previous year, it is certainly helpful to have all your K-1s in on time. As a reality check, last year we received the vast majority of our 2021 K-1s between May and August of 2022. We were prepared; we had filed for an extension. We were easily able to add these late K-1s into the mix in time to meet the extended deadline. But some people may have a refund coming or otherwise not want to deal with an extension.

But (2), it's our view that great firms that are really on top of all the details are likely to get other things right, too. We have no way of making an empirical claim of this sort--get your K-1s to your investors on time, generate better returns--but we do know that we like syndicators/operators who get the little things right, from communications to expectation-management to tax documentation. We believe that these things are all connected. So, all things considered, we prefer to receive timely K-1s even as we are resigned to filing for an extension for the rest of our tax-filing days given the number of syndication and private fund investments we have at this stage.

And so far so good with our own investments: those firms that have tended to file timely K-1s have also met or exceeded what they promised in their pro formas.

(If you want to learn more about Cape Sierra Capital, you can see David Kamara, the principal, interviewed by his sister, Jennifer Kamara, on this video.)