Paying Taxes on Money You Never See

The following are quotations from brochures recently examined.

Syndicate No. 1

In the llth year of ownership, the amount report-able as taxable income will exceed the cash distribu­tion at which time the amount of taxable income will be $573.91 as compared to the cash distribution of $550.00 per unit. In the 12th and succeeding years, the excess of taxable income over the cash distribution will increase.

Syndicate No. 2

In the 8th year and thereafter, the net income re-portable for federal income tax purpose will exceed the annual cash distribution if mortgages have not been re­financed before then.

Do these statements mean that you may have to pay income taxes on money you never receive? Yes, they do. To make this quite clear, you may for instance receive a distribution of $500 a year, representing a 10% distribu­tion on your $5,000 investment. For income tax pur­poses, let us say that you are deemed to have received $700 a year. This is quite possible. Does this mean that you have to pay income tax on $700 even though you re­ceived only $500? Again the answer is yes. If you are in the 40% income tax bracket, you will pay 40% taxes on $700, that is $280.00. Your distribution amounted to $500. After paying $280.00 in income taxes, you end up with $220.00. This is only 4.4% net return on your in­vestment, and a far cry from the 10% you expected.

You must examine the brochure to see whether you will have to pay each year higher income taxes on your distributions. Some brochures will actually contain in­formation like that set forth at the beginning of this chapter. Then it is easy. Others will simply show that in every year the taxable portion of the distribution in­creases, but the projections are not made far enough into the future. If that is the case, be careful. If you are not sure, ask your accountant or get a letter from the syndicator, if you can.

We have told you what to look for. It is not really nec­essary for you to know why you may have to pay taxes on moneys which you will not receive. If the syndicator, who wants to sell you participations gives you this unfavor­able information, directly or indirectly, you can take his word for it. You may, therefore, skip the next two chap­ters and go on to the following one. However, if you are curious, read on. An explanation and illustration follow. But we want to give you fair warning. This is not easy.

Next: Taxes you pay