Real Estate Tax
Ted Lanzaro on Why Late K-1s Start Months Before Tax Season
The real estate CPA explains how syndicators can get K-1s out by February by settling outside bookkeeping, investor lists and cost segregation studies before the year ends.
How to Get K1s Out On Time with CPA Ted Lanzaro
Video from Smart Syndicator.
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Why do syndication K-1s go out late, and how can operators get them out on time?
Late K-1s usually trace back to work nobody finished during the year: bookkeeping for the bank account opened before closing, investor lists missing tax ID numbers, and cost segregation studies ordered too late. Ted Lanzaro has syndicators settle all three before December 31, so returns can start in late January and K-1s can go out in February.
Ask a group of syndicators about tax season and the late K-1 comes up fast. When the forms arrive weeks after investors expect them, the phone starts ringing and confidence in the operator slips. On a Smart Syndicator episode, the host asked Ted Lanzaro what operators can do about a problem he called the bane of their existence.
Ted Lanzaro is a CPA who has prepared more than a thousand tax returns for syndications and has worked in the field for more than 30 years. His answer is that late K-1s are rarely caused by the tax return itself. They come from bookkeeping, investor data and engineering work that was left until the new year.
His firm's goal is to have every syndication client completely ready before the end of January, so returns can be prepared in late January and February. That only happens when the slow, administrative parts of the return are finished during the year, while the operator still has time to fix what is missing.
Key takeaways
- Record the activity in the bank account opened before closing, or the year-end balance sheet will be missing the building.
- Review investor lists in the summer so missing Social Security and tax ID numbers are collected before the year ends.
- Order the cost segregation study soon after closing, since only deals closed in November or December should have to wait.
- Put the most detail-oriented person on the team in charge of investor records to avoid amended K-1s.
1. The bookkeeping the management company never sees
Every syndication starts with a bank account opened before the property is bought. Investor money comes in, and lending fees, insurance and other costs may be paid out of it before closing. Once the deal closes, money moves to the management company, which starts keeping the property accounts. Ted Lanzaro points out that the management company has no record of anything that happened before it took over.
The result shows up at year end. He is often handed a profit and loss statement and a balance sheet from the management company in which the building does not appear at all. He said this happened on about ten different new deals in a single tax season, and each one meant reconstructing the outside account before the return could start.
His fix is to do that bookkeeping monthly as the year goes, or to pair the syndicator with a bookkeeper who does it. Before December 31, the management company receives a journal entry recording the outside activity, the purchase of the property and the capital raised. That way the December reports produce a complete balance sheet, and no tax season accounting holds up the K-1s.
2. Investor lists are the slowest part of the return
The second cause he sees is just as common: incomplete investor lists. Many investors value their privacy and leave their Social Security number out of the syndication portal. A list of 50 investors can easily be missing five tax ID numbers. In one case he described, an operator needed more than three weeks to collect five numbers, which pushed the K-1s past March 15 and into late March.
Single-member LLCs add another layer. Ted Lanzaro explains that the IRS wants the name and tax ID number of the LLC as well as the full name and Social Security number of its single member. He also questions why limited partners use them at all, since a limited partner does not carry the liability the LLC is meant to shield against.
His firm now reviews investor lists in August and sends operators a list of what is missing, such as bad addresses or absent numbers. Once a list is complete, it goes into the tax software as soon as the new version arrives in the fall. Entering investors and their ownership percentages is the most time-consuming part of the return, so finishing it early gives everyone a head start.
3. Order the study early and keep the records tight
Cost segregation studies are the third bottleneck. The firms that do them get backed up as tax season approaches, so he advises ordering the study soon after closing. In his view the only deals that should wait on a cost segregation firm are those closed in November or December. Many operators already get preliminary estimates during due diligence, because they use the projected depreciation to raise capital.
He also warns against saving money on the wrong study. A desktop study, done from paperwork, may cost a few thousand dollars less than one where an engineer visits the property, but it tends to produce a more conservative allocation. On a project worth more than a couple of million dollars, he says, a smaller allocation can cost investors far more in tax benefits than the fee saved.
Beyond the checklists, he comes back to organization. As a syndication business grows, the chance of missing something grows with it, and he recalls a client who left an investor off a deal's list and had to amend the return. Sending amended K-1s is an investor relations nightmare, so he recommends putting the most detail-oriented person on the team in charge of the records.
