Partnership Drawback Is Power of Organizer

QUESTION: My attorney is organizing a group of about 10 investors who will put up $20,000 each to invest in a small apartment building. What do you think of this idea?

ANSWER: Although your question is vague, it is extremely important. Many people think they would like to become involved in a group real estate investment where someone else will do all the work of managing the property and investors will reap the profits.

The primary pitfall of limited partnerships or syndicates is the investors are dependent on the general partner organizer, such as the attorney in your situation. If all goes well, that person is a hero. But if problems develop, there is little the investors can do.

For example, a close friend of mine invested with a very experienced major syndicator in a Chicago apartment project. All went well for a few years, but then there wasn’t enough rental income to pay the mortgage payments and the property was lost by foreclosure.

To make matters worse, the investors had a problem called “debt over basis,” which means that the foreclosed mortgage balance was greater than the depreciated book value of the building. The result was that the investors had to pay income tax on debt relief, but they didn’t receive any cash from the property that was lost.

In summary, I do not recommend group investments because the investor is at the mercy of the syndicator’s ability to make the project profitable. I don’t like the feeling of being dependent on other people.

Fund Shift Voids Starker Deferral

Q: I have sold my commercial store building to the tenant. Then I read about Starker delayed tax-deferred exchanges. Since the money from my sale is still sitting in my bank account, can I avoid tax by using it to acquire another investment property?

A: No, you can’t. It becomes too late to defer tax on your sale profit by making a tax-deferred IRC 1031(a)(3) Starker delayed exchange once you have either received the sale proceeds or you have the right to receive that money.

You can’t defer tax by making an exchange if you already completed your sale of property held for investment or use in a trade or business.