Short answer
When a property is held in a partnership, whether a two-person LLC or a syndication with a sponsor and dozens of limited partners, the cost segregation study is done once at the partnership level, and its depreciation flows to each partner's Schedule K-1 as part of the partner's distributive share. The partnership pays no income tax; the partners do. Whether a partner can use the loss the study produces is decided on that partner's own return by the basis limit, the at-risk rules and the passive activity rules. For a limited partner, the passive rules are usually decisive: a limited partner's interest is generally treated as one in which the partner does not materially participate, so the K-1 loss is passive and usable only against passive income, within the special allowance, or when the interest is disposed of. This article explains the pass-through, what limited partners can actually use, what sponsors should disclose, and the questions to ask before investing on the strength of a projected first-year loss. It is general education, not tax or investment advice.
How the deduction travels
| Level | What happens |
|---|---|
| Partnership | Owns the property, commissions the study, elects in or out of bonus depreciation by class, computes depreciation, allocates it under the partnership agreement |
| Schedule K-1 | Reports each partner's distributive share of rental income or loss, including the depreciation, plus the items the partner needs for the at-risk and passive computations |
| Partner | Applies three limits in order: basis in the partnership interest, amount at risk, passive activity rules; whatever survives is deducted; whatever does not is suspended under the limit that stopped it |
The study's quality is a partnership-level question, and the IRS guide's elements and examination requests apply to the partnership's study like any other. The usability of the deduction is a partner-level question, and it differs from partner to partner.
The three partner-level limits
- Basis. A partner may deduct losses only up to the basis in the partnership interest, which includes the partner's share of partnership liabilities. A large first-year loss can exceed a small cash investment; the share of the mortgage often supplies the basis, subject to the partnership's allocation rules.
- At risk. Losses are limited to the amount the partner has at risk, which includes qualified nonrecourse financing secured by real property. Most real estate debt qualifies; other arrangements may not.
- Passive activity. A limited partner is generally treated as not materially participating, and rental real estate is passive in any case unless the partner is a real estate professional who materially participates in the activity. The result for most limited partners is a suspended passive loss: carried forward on Form 8582, used against passive income, and released in full when the entire interest is disposed of in a fully taxable transaction.
A partner who is a real estate professional and materially participates in the partnership's rental activity is the exception; a passive investor writing a check is not.
What "you'll get a big loss on your K-1" means
Sponsors often market a first-year K-1 loss that exceeds the cash invested, produced by a study and 100 percent bonus depreciation on property acquired after January 19, 2025. The statement can be true and still tell an investor nothing about their tax. The loss is passive for the typical limited partner. It offsets passive income from this or other investments, or the special allowance if the partner actively participates, which limited partners generally do not, and otherwise waits for a sale. It does not reduce tax on wages. And when the property is sold, the section 1245 recapture on the reclassified property and the unrecaptured section 1250 gain on the building flow through on the K-1 in the year of sale, together with the release of the suspended losses.
An investor with passive income from other sources is the one for whom the projected loss is a current benefit. Everyone else should read the projection as a deferral.
What to ask a sponsor
- Is a study planned, who will prepare it, and will it meet the elements the IRS guide lists?
- Will the partnership take bonus depreciation, elect the transition rate, or elect out, and who decides?
- How is depreciation allocated among classes of partners under the agreement?
- What is my share of liabilities for basis and at-risk purposes, and does the financing qualify?
- What does the sponsor's projection assume about my ability to use the loss, and is that assumption stated?
- What are the sponsor's plans for hold period, sale or exchange, and how will recapture be allocated?
- Will I receive the study or a summary with the K-1, so my adviser can see what was reclassified?
A sponsor who answers with a savings figure and no assumptions is marketing, not disclosing.
For sponsors and general partners
The partnership's return, the study and the K-1s are the sponsor's responsibility. Points that recur in disputes: elections made without a documented decision; depreciation allocations inconsistent with the agreement; investors told the loss was "usable" without qualification; and a study that would not survive the examiner's requests, which then produces adjustments passed through to every partner. A study done to the IRS guide's elements, with a reviewer, and a projection that states its passive-activity assumptions, protects the sponsor as much as the investors.
Transfers of interests
When a partner sells an interest, or a partner dies, the partnership may make or have in place an election that adjusts the basis of partnership property for the transferee. A study's asset list is what allows that adjustment to be allocated across classes of property. This is a partnership-tax specialty; ask the partnership's adviser.
What people ask on Reddit and other forums
Syndication investors are a large share of the "cost segregation reddit" threads on r/realestateinvesting and r/syndication. The searches that lead people to these threads are usually phrased "cost segregation syndication", "K-1 passive loss real estate syndication" and "limited partner material participation".
"My K-1 shows a loss bigger than what I invested. Can I deduct it against my salary?" Usually not. For a limited partner the loss is passive; it offsets passive income or waits for a disposition. Basis and at-risk limits may also apply.
"Can I be a real estate professional through my LP interest?" Real estate professional status depends on your own hours in real property trades or businesses in which you materially participate. A limited partner is generally treated as not materially participating, with limited exceptions. Ask your adviser.
"What happens when the syndication sells?" Recapture on the reclassified property and unrecaptured section 1250 gain flow through on the K-1, and your suspended losses from the investment are released in full on a fully taxable disposition of your entire interest.
"Should I invest for the tax loss?" Invest for the investment. The loss is a deferral whose value depends on your passive income and the hold; a projection that assumes you can use it this year is wrong for most limited partners.
Questions people also ask
Does a syndication do the cost segregation study or do I?
The partnership does, at the entity level. The resulting depreciation is allocated to partners on Schedule K-1.
Can a limited partner use a passive loss from a syndication?
Against passive income from this or other investments, within the special allowance if the partner actively participates, or on a fully taxable disposition of the entire interest. Not against wages, as a rule.
Does bonus depreciation flow through to partners?
Yes; the partnership's election applies to the partnership's property and the resulting depreciation is part of each partner's distributive share.
What limits apply to my K-1 loss?
Basis in the partnership interest, the at-risk rules and the passive activity rules, applied in that order on your return.
What should the sponsor give me?
The K-1, the information needed for the basis, at-risk and passive computations, and ideally the study or a summary of what was reclassified.
Sources
- https://www.irs.gov/publications/p541 — IRS Publication 541, Partnerships: partnership income or loss; partner's basis; limits on losses.
- https://www.law.cornell.edu/uscode/text/26/469 — 26 U.S.C. §469(h)(2), limited partners.
- https://www.irs.gov/publications/p925 — IRS Publication 925 (2025), Passive Activity and At-Risk Rules: limited partners; rental activities; dispositions; at-risk limits.
- https://www.irs.gov/publications/p544 — IRS Publication 544 (2025), Sales and Other Dispositions of Assets: Chapters 3 and 4.
- https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill — IR-2026-06 (January 14, 2026), bonus depreciation guidance.
- https://www.irs.gov/pub/irs-pdf/p5653.pdf — IRS Publication 5653, Cost Segregation Audit Techniques Guide (Rev. 2-2025): Chapters 4 and 5.
Related reading
- Passive loss carryforwards: what happens to suspended losses
- Why a deduction is not a refund
- Depreciation recapture after cost segregation
- Cost segregation for multifamily and apartment buildings
- The real estate professional test explained
- What Reddit asks about cost segregation, answered with sources
- Find a practitioner in the NBCSS directory