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Will CrowdStreet Blended Portfolio (CSBP) be filing state composite tax returns on my behalf?

CSBP I LLC will not be filing state composite tax returns on an investor’s behalf and here’s why:

It is not practicable to obtain unanimous consent from each investor in each state, which is required to complete composite tax returns. 

Complex rulings, inherent limitations and the requirement to obtain 100% consent from each investor in each state render it impossible to complete composite tax returns. Some of the reasons why the Portfolio believes this is impossible may include (but not limited to) the following: 

  • It is not practicable to obtain, track and record consent for each investor in each state for each series. Each series of the Portfolio has on average 210 investors and typically invests in 20-30 states.
  • Not all states allow for composite returns, yet we have investors in all states.
  • For those states that allow for a composite tax return, not every investor may qualify to be included in such a return. Many states only allow participation by nonresidents of a state that a composite tax return is being filed for during the tax year and investors in the CSBP series are in all 50 states.
  • Many state rules limit composite tax return participation to only nonresidents whose sole source of in-state income is the filing partnership, CSBP, in this case. For example, an individual who invests in CSBP I LLC and a different partnership, may be ineligible to participate.
  • Some states may only allow individuals to participate in a composite tax return filing, leaving trusts, partnerships, and other entities ineligible, all of which are investor types within the CSBP series. 

As a reminder, it only takes one investor per series to either be ineligible or to decline to consent for us not to be able to provide a composite tax return.

Composite returns typically do not provide the benefit to CSBP and its members as it may for entities, such as closely held LLCs or family offices. In those types of entities, persons who are parties to that investment are likely to have similar tax status, usually providing for a simpler route to complete composite tax forms. It is usually unlikely that a single portfolio series with more than 100 investors would all have similar tax positions in various states, which is the case of CSBP. 

Use of composite tax returns can result in higher marginal tax rates and therefore lower IRR.

Under composite return rules, the income bracket is determined based upon income of the entire group prior to any allocation which often results in a higher tax bracket.  It is likely that by allocating the investments over individual investors the income bracket will be materially different for tax purposes and could result in significant tax savings for investors, potentially increasing the IRR.

Investors may also opt-out of composite tax forms due to the fact that the investor may not be able to take advantage of deductions, losses, or credits that would be able to be used if the investor were to file independently. 

As such, investors may choose to opt-out of receipt of composite tax returns due to the likelihood of being subject to higher tax rates and/or limited deductions.

Potential increase in tax preparation fees.

Due to the complexity in completing composite tax returns, they can be more expensive to prepare. Any increase in tax preparation fees associated with the completion of composite tax returns would be passed through to the members of the Portfolio, thereby further reducing the IRR and likely advantages of composite tax filings to individual members.

Summary

Overall, given the number of investors and the tax statuses of each individual investor in CSBP it is unlikely that all investors will be eligible for participation in composite tax returns.  Furthermore, if only one investor is not eligible or otherwise refuses to consent, composite tax returns may not be used.  Additionally, CSBP believes the benefits of utilizing composite tax returns for investors (i.e., potentially lower tax preparation costs) are outweighed by the reduction in IRR caused by the use of composite tax returns such as higher marginal tax rates, loss of deductions and higher tax preparation costs passed through to investors.  We recognize that previously CSBP believed, and disseminated the belief, that composite tax returns would ease the tax burden on investors and therefore be considered.  Upon further analysis, CSBP now concludes that given the investor base it is unlikely that CSBP could produce composite returns and even if CSBP could, the benefit of such returns is likely outweighed by the costs for many investors.  

You should consult your tax advisor regarding your particular circumstances. Tax aspects of such investments can be complex and may differ depending on the property or offering and on individual tax circumstances. Neither CrowdStreet or its affiliates offer tax or legal advice. Investors are strongly encouraged to seek advice from qualified tax professionals and/or legal experts regarding the tax consequences based on their particular circumstances.