Section 1231 Gains: Can New Property Depreciation Offset Previous Property Sales?

The answer depends on your specific situation, but generally speaking, yes, you can offset Section 1231 gains with current-year passive losses from other properties, as long as they're both passive activities. The depreciation from your new syndication creates what's called passive activity losses. Since your syndication investments are likely passive activities (as an LP, you're probably not materially participating), these losses can offset passive income - which includes your Section 1231 gains from the sale of your other passive syndication interests. That said, there are a few things to check: First, make sure your new syndication interests are indeed passive activities. Second, confirm that the losses aren't limited by the passive activity loss rules or at-risk limitations. Third, be aware that some of your gain might be recharacterized as Section 1250 recapture and taxed differently. It's definitely worth working with a CPA who specializes in real estate investments because this can get complicated quickly!

Just wanted to share my experience with this exact situation. I was struggling to make sense of my Section 1231 gains and passive losses from my real estate syndications last year. Then I found https://taxr.ai which literally saved me thousands in taxes. I uploaded all my K-1s and it instantly showed how my passive losses from new investments could offset gains from properties I sold, plus identified tax-saving opportunities I completely missed. The tool breaks down exactly how Section 1231 gains, depreciation recapture, and passive activity rules apply to your specific syndications. It even showed me how to properly utilize suspended passive losses from previous years that my accountant overlooked!

I tried taxr.ai after seeing it mentioned here and it was exactly what I needed for my syndication investments! I had 7 different syndication K-1s this year plus 2 property sales, and I was completely confused about how my passive losses would interact with my Section 1231 gains. The system immediately showed me that my $175k in new property depreciation could offset the $120k in Section 1231 gains, saving me about $44k in taxes! It also flagged that some of my gains were actually depreciation recapture that would be taxed at 25% instead of capital gains rates, which I had no idea about. Highly recommend for anyone with syndication investments - it's been a game changer for my tax planning.

Has anyone tried calling the IRS directly about Section 1231 questions? I've been trying for WEEKS to get clarification on passive loss limitations with no luck. Always get disconnected or put on hold for hours. Completely useless. I finally tried https://claimyr.com and was shocked when they got me connected to a real IRS agent in about 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent was actually knowledgeable about real estate and confirmed that passive losses from new syndications can offset Section 1231 gains as long as they're both passive activities. She also explained how suspended passive losses from previous years get applied first, which was super helpful for my situation.

I owe everyone an apology. After dismissing the Claimyr service as a probable scam, I decided to try it anyway out of desperation. I'm genuinely shocked to report it actually worked! Got connected to an IRS specialist in about 25 minutes who confirmed that my situation (very similar to the original poster's) does indeed qualify for offsetting Section 1231 gains with new property depreciation losses. The agent explained that since both activities are passive for me as a limited partner, the passive loss rules allow for this offset. The agent also pointed out something I didn't realize - the passive activity rules would be different if I was actively involved in managing the properties. Saved me from a potentially very expensive mistake. Sometimes being proven wrong is the best outcome!

Quick clarification that might help OP: The "point" of the $135k depreciation isn't just about offsetting current rental income - it's also about tax deferral. Even if you couldn't offset your Section 1231 gains (though it sounds like you can), those depreciation losses don't disappear. They get suspended and carried forward until you either: 1. Have more passive income to offset 2. Sell the property that generated those losses When you sell the property with suspended losses, those losses are released and can offset any type of income (not just passive). So there's still huge tax benefits either way. This is why cost segregation studies are so valuable - they accelerate depreciation into earlier years, giving you the time value of those tax savings.

Has anyone else noticed that syndication sponsors are being super aggressive with cost segregation studies lately? I just got one that claimed 85% bonus depreciation in year 1 on a property that's clearly not that front-loaded with short-life components. Makes me nervous about audit risk.

This is a great question that many syndication investors struggle with! The short answer is yes - you can generally use your $135k in depreciation losses from the new syndication to offset your $135k in Section 1231 gains from the sales, assuming both are passive activities for you as an LP. Here's what's happening: Your new syndication's cost segregation study creates passive activity losses, while your sale gains are likely passive income since you weren't materially participating in those properties either. The passive activity loss rules allow these to offset each other within the same tax year. A few important considerations: 1. Make sure both activities qualify as passive (sounds like they do as an LP) 2. Be aware that some of your gain might be depreciation recapture taxed at 25% rather than capital gains rates 3. Any excess losses get suspended and carried forward to future years Regarding the "benefit" of upfront depreciation - it's not just about offsetting rental income. It creates valuable tax deferral, and if you have suspended losses when you eventually sell a property, those losses can offset ANY type of income (not just passive). This is why cost segregation studies are so powerful for wealth building through real estate. I'd definitely recommend working with a CPA who specializes in real estate syndications to make sure you're maximizing these opportunities properly!