Passive real estate investing and tax rates

[gb_1435]

Hello,

I began investing in real estate as a passive investor a couple of years ago, and I received a distribution for the first time this year, with the Schedule K-1 calling out the gain. I noticed that when I was entering the information from the K1 in Turbo Tax, it calculated the tax on the gain at ~31% tax rate. I thought (and I could be wrong) that long term capital gains as an real estate investor maxed out at 20%, so am a bit surprised to see this tax rate. 

Any thoughts as to why this is occurring?

Thanks in advance. 

[jtax]

Without more detail on the box numbers on your K-1, here is my guess as to what is going on. Rental income from real estate investments (e.g. box 2  of K-1) is not capital gain. It is ordinary income. When you sell or the partnership sells and you exit your investment, you may (or may not) have a capital gain.

[gb_1435]

Thank you for your response. 

This is a syndication investment where I have 1 unit/share in investment in single family housing development that I’m receiving a share of profits. It’s not rental income. I would think this is capital gains and not ordinary income. 

[jtax]

Most investments like this are structured as pass through entities (LLCs taxed as partnerships). The investors are taxed as if the income were "passed through" to them. It retains the same "character" (ordinary/capital) as it has in the hands of the business. Developers are in the business of developing, not in the investing business, although this is pretty complicated and everyone always tries very hard to turn ordinary income into capital gains so there are many rules to try to prevent that or make it difficult.

Were you to sell your interest in the entity at a gain, that gain would be a capital a gain.

For example see this attorney's article:

https://www.fletchertilton.com/1C2194/assets/files/News/Real%20Estate%20Investor%20or%20Dealer.pdf