Breneman Blueprint: Real Estate and Entrepreneurship Podcast · Drew Breneman

Common Misconceptions From Passive Investors with Tom Stein - E111

·33 min·2 clips

Depreciation can create a tax loss now, but depreciation recapture shows up when the property sells.

1. Breneman Blueprint: Real Estate and Entrepreneurship Podcast E111 focuses on common misconceptions from passive investors, especially around taxes, preferred returns, 1031 exchanges, and market selection. 2. Drew Brenneman hosts Tom Stein, the Director of Investor Relations for Brenneman Capital, and Tom matters because he fields investor questions on deal structure and tax mechanics. 3. The episode asks what passive real estate investors misunderstand most, and the answer centers on how cash flow, tax losses, and exit taxes actually work. 4. Drew says the popular claim that depreciation means investors will "never pay any tax" is wrong, and he adds a CPA disclaimer before walking through the details. 5. A $100 rent / $75 expense / $35 depreciation example shows how a property can distribute $25 of cash while still showing a $10 taxable loss. 6. Drew says that loss is only a timing benefit, because depreciation recapture can trigger a 25% federal tax rate plus state tax when the property is sold. 7. He says a 7- to 10-year hold gives a better timing benefit than a 3- or 4-year syndication, because taxes are deferred longer. 8. Tom says the preferred return is part of the waterfall, not the same as the deal’s cash yield. 9. A deal with an 8% preferred return and 5% cash yield can pay investors 5% current cash while still owing the 8% preferred amount over time. 10. Drew says if a deal only returns 6% overall, investors get the 6% and the sponsor does not receive the incentive fee above the hurdle. 11. Tom says cost segregation accelerates depreciation losses into years one through five, which can make early K-1 losses look larger. 12. Drew says most investors still cannot use those losses against W-2 income, because passive losses generally stay inside passive investment buckets. 13. He gives the example of a California investor with passive income from older properties who can use losses from Brenneman deals more effectively. 14. Drew says 1031 exchanges require direct property ownership, so a membership interest in an LLC does not automatically qualify. 15. Tom describes a "drop and swap" structure using tenants in common when some owners want a 1031 and others want to cash out. 16. Tom also describes a "lazy 1031" where an investor sells one property, invests in a new syndication in the same tax year, and uses new deal losses to offset the old gain. 17. The tone is practical and tax-heavy, with Drew and Tom pausing often to restate examples in plain language. 18. The format is a back-and-forth interview that ends with Drew and Tom comparing Sunbelt oversupply to Midwest rent growth and occupancy. 19. Passive investors comparing tax treatment across syndications. 20. Listeners looking for market talk without tax details.

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