Will CSBP be filing state composite tax returns on my behalf?
CSBP I LLC will not be filing state composite tax returns 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. Reasons why the Portfolio believes this is impossible include the following (not exhaustive):
- 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. Most 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.
- If an individual’s investment in CSBP is the only source of in-state income. 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 tax returns are most effective for closely held LLCs or family offices
Composite returns typically do not provide the benefit to CSBP and its members as it does to 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, providing for a simpler route to complete composite tax forms. It is highly 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 typically results in higher marginal tax rates and therefore lower The Internal Rate of Return (IRR) is the rate at which each invested dollar is projected to grow for each period it is invested. It differs from other metrics in that it accounts for the concept of the “time value of money”, or the fact that a dollar received and reinvested elsewhere today is worth more than a dollar expected... More
Under composite return rules, the income bracket is determined based upon the income of the entire group prior to any allocation which almost always results in a higher tax bracket. It is highly 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 all investors thereby 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 strong likelihood of being subject to higher tax rates and/or limited deductions.
Increase in tax preparation fees
Due to the complexity in completing composite tax returns, they are substantially 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 most likely any advantages of composite tax filings to individual members.
Overall, given the number of investors and the tax statuses of each individual investor in CSBP, it is extremely 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 extremely unlikely that CSBP could produce composite returns and even if CSBP could, the benefit of such returns is most likely outweighed by the costs for many investors.
You should consult your tax advisor regarding your particular circumstances.
What is a K-1?
The Schedule K-1 is a standard IRS form that is issued annually to report activity from investments in partnership interests. The K-1 will report to you your share of any taxable items for the calendar year for investments that you hold membership interest in.
If you are an investor in CrowdStreet Blended Portfolio I LLC (“CSBP”), you hold membership interest in an LLC (limited liability company) classified as a partnership. As such, the taxable activity earned by CSBP through real estate investments is allocated to all of the individual members (partners) in the Portfolio based on ownership percentage and is reported to the investors through the K-1. Your K-1 will be issued to you from the specific Series of CSBP that you are invested in.
To learn more about the real estate Schedule K-1 and if items such as depreciation will be included on the K-1, please visit the following articles in the CrowdStreet resource library:
How many K-1s will I receive?
An investor will receive a single federal Schedule K-1 for its investment in a Series of CSBP. Because each series of CSBP is treated as a separate partnership for tax purposes, an investor with holdings in more than one Series will receive a Federal Schedule K-1 for each Series. You should also expect to receive a state K-1 for each investment in a state where a state filing was necessary by the Portfolio.
Do I need to file out-of-state tax returns and why?
You may have an out-of-state filing requirement in states where investments are made. When a taxpayer owns an indirect interest in real estate through a partnership (including an LLC classified as a partnership for tax purposes), it may result in a state income tax filing obligation for such taxpayer in the state where the real estate is located (even for nonresidents). For investments held in states that do not assess income tax, or that have minimum filing requirements below your assessed income, out-of-state returns would not be filed. Also refer to the Q&A regarding “How many K-1s will I receive”. Please consult your tax advisor to determine what your state filing requirements are.
When will I receive my K-1s?
CSBP will deliver Schedule K-1s to investors as soon as it receives the underlying Schedule K-1s from investment vehicles. CrowdStreet will speed up the filing process by i) working with In commercial real estate, the sponsor is an individual or company in charge of finding, acquiring and managing the real estate property on behalf of the partnership. The sponsor is usually expected to invest anywhere from 5-20% of the total required equity capital. They are then responsible for raising the remaining funds and acquiring and managing the investment property’s day-to-day... More to underscore the importance of timely Schedule K-1 delivery and ii) working with CSBP I’s tax accountant to process the underlying Schedule K-1s as they are received. Investors will receive K-1 packages from CSBP I after April 15th and should be prepared to file extensions.
Will I still receive a K-1 even if I haven’t received a distribution yet and there is no income to report from the underlying real estate investment?
You should still expect to receive a K-1 from your investment in CSBP as it will report to you your share of interest income and portfolio and organizational expenses related to CSBP.
Other Filings: 990-T
When an IRA (and SD-IRA) invests in alternative investments, such as a real estate investment, they may be required to file a 990-T Exempt Organization Business Income Tax Return when the investment generates UBTI (unrelated business taxable income). These returns are compiled at the IRA account level, not at the underlying investment level. If it is necessary for an IRA to file a 990-T, it will generally be prepared by the IRA Custodian, based on the aggregate amounts reported on the K-1s provided by all investment vehicles. For Self-Directed IRAs, the investor or their tax accountant would prepare the form. If you have invested in a marketplace deal via an IRA account, please consult your IRA Custodian or tax advisor to determine what your 990-T filing requirements are.
For more details regarding investing through an IRA account and UBTI, please visit the following articles in the CrowdStreet resource library:
Disregarded Entities and W-9s
As stated by the IRS, the IRS treats a single-member Limited Liability Company (SMLLC) with activities reflected on its owner’s federal tax return as a “disregarded entity”. In regards to the Taxpayer Identification Number and use of it on the form W-9, the IRS states the following:
“For federal income tax purposes, a single-member LLC classified as a disregarded entity generally must use the owner’s social security number (SSN) or employer identification number (EIN) for all information returns and reporting related to income tax. For example, if a disregarded entity LLC that is owned by an individual is required to provide a Form W-9, Request for Taxpayer Identification Number (TIN) and Certification, the W-9 should provide the owner’s SSN or EIN, not the LLC’s EIN.”
If you are investing through a single-member LLC, make sure when completing the form W-9 you are carefully reading and following the form instructions.
For more information regarding this topic, please visit the following:
CROWDSTREET, INC. AND ITS AFFILIATES DO NOT PROVIDE TAX, LEGAL, OR ACCOUNTING ADVICE. THIS MATERIAL HAS BEEN PREPARED FOR INFORMATIONAL PURPOSES ONLY, AND IS NOT INTENDED TO PROVIDE, AND SHOULD NOT BE RELIED ON FOR, TAX, LEGAL, OR ACCOUNTING ADVICE. YOU SHOULD CONSULT YOUR OWN TAX, LEGAL, AND ACCOUNTING ADVISORS FOR ADVICE REGARDING AN INVESTMENT AS IT RELATES TO YOUR PARTICULAR TAX CONSIDERATIONS.