Imagine this. Your surgery center brings in steady revenue year after year. Taxes on that income take a big bite every spring. Most of the time those deductions push taxable income to a loss even though the property is making money and cash flowing. This is the secret that the ultra wealthy use to create exponential wealth growth while paying little or no taxes.
Why so many docs look at syndications
First, a quick background. Real estate syndications let you invest as a limited partner (LP). You give capital. The sponsor runs the deal. You don’t have to handle tenants, repairs, or management.
Because syndication deals own real property, they generate non-cash deductions like depreciation and other write-offs. These appear on your K-1. Many times, those deductions push “taxable income” down even if the property is cash-flowing.
The question is: Can those deductions help you with your surgery center income? The answer is yes, as long as your surgery center ownership is considered passive. Doing active cases in the surgery center does not count. Check with your CPA to see how your income is classified.
Understanding the “Active vs Passive” rule
A big tax rule is about “passive activities.” The IRS treats real estate limited partner investments into syndications as passive. Passive losses can offset passive taxable income and save you money.
- Passive income includes all limited Partner investments into syndications for any type of real estate or business opportunity.
- Active income is what you earn by your efforts: your salary, professional fees, or income from a business in which you materially participate.
How big deductions show up (and “paper loss” magic)
A big draw is that depreciation and cost segregation create high deductions early on even in years when the property’s cash flow is positive. That’s the “paper loss” effect.
Here’s how it works:
- The syndication may do a cost segregation study. That breaks parts of the building into shorter life assets (e.g. appliances, carpet, parking lot, etc.). Those can qualify for faster depreciation or bonus depreciation.
- Under current law, you may be able to take bonus depreciation showing a loss in the first year of up to 90% of your investment. That’s right, you could invest $100,000, be making a 20 or 30% annual return on your money, and show a $90,000 loss in the first year to offset not only this income but other sources of passive income. Why would the IRS allow this? Because they want to incentivize investors to create jobs, create housing, supply essential services and support energy development.
So you might see a big negative “loss” in year one, even though the ultra wealthy have been maximizing wealth growth by utilizing this tax strategy for years.
Scenario: Using depreciation to offset passive surgery center income
Let’s walk through a sample scenario. Names and numbers are illustrative.
- You own part of a surgery center as an LP. You are doing cases in the surgery center, but you are not active in operations. Your share of net profits from the surgery center is treated as passive income.
- You invest $200,000 into a real estate syndication. That deal runs cost segregation and bonus depreciation.
- In that first year, your share shows a $120,000 depreciation loss (paper).
- Meanwhile, your share of surgery center profits (passive income) is $100,000.
In that case, you can offset the $100,000 passive income with $100,000 of the syndication’s passive loss. The remaining $20,000 loss is “suspended,” to be used in future years or when you exit the syndication.
This results in lower taxable income overall even though cash is still flowing from both investments.
Tips for surgeons or professionals thinking of this
- Check your role in your surgery center. Ask your CPA if your income is classified as passive.
- Ask about the tax structure up front in any syndication. Does the sponsor use cost seg? Bonus depreciation?
- Get a good tax specialist who understands Section 469, passive losses, cost segregation, and real estate professional rules.
- Be strategic about exit timing. Always talk to a tax strategist or real estate professional before selling so you don’t recapture depreciation unnecessarily.
Connect with Us: Contact Timberview Capital