A sponsor showed his LPs 10.1%. After tax, they keep 7.0%.

A worked teardown of a 70-unit multifamily ground-up development, run through the CREDevSim engine. The pre-tax pitch and the number investors actually pocket are not the same number, and the gap lands almost entirely at the exit, where most decks stop.

Kasing Ng, CPA, former Big 4 auditor

Skip the read, see the full sample PDF →

1. The number in the deck

Pre-tax, this is a solid development, and the pitch is honest as far as it goes. LP internal rate of return of 10.1%, a 1.62x equity multiple over seven years, built to a yield on cost about 200 basis points above the exit cap. That is the number in the investor summary. It is also the number that stops at the sale line and never crosses into the LP's tax return.

2. The number LPs actually keep

Carry the same deal through tax at the investor level and the LP return lands at 7.0%, a 1.40x multiple. That is a 3.1-point drag on IRR between the pitch and the pocket. This LP sits in California, so part of that drag is the 13.3% state tax; a Texas or Florida investor keeps a little more. It is not a rounding error and it is not pessimism. It is the tax the pre-tax model simply does not carry.

3. Where the 3.1 points go

Almost all of the gap shows up in one place: the exit. The deal throws off about $3.89M of tax at sale, and the LPs bear their $3.16M share of it. That is the number that drives the 7.0%. Because this is a straight-line deal with no accelerated depreciation, the split is the opposite of what people expect. About $2.61M is long-term capital gain on the appreciation, taxed near 37% (20% federal, plus the 3.8% net investment income tax, plus 13.3% California). The other $1.28M is unrecaptured §1250 gain, the straight-line depreciation coming back at the 25% federal cap plus the same add-ons, about 42%. Neither is the flat 20% most investors carry in their heads. A pre-tax pro forma shows none of this, because it ends before the tax return begins.

4. The cost-seg study we told the sponsor to skip

Here is where the audit habit earns its keep, and it cuts the other way from what you might expect. A cost-seg firm is paid to find a deduction. I am paid to tell you whether taking it is worth the fee. On this deal the answer was no, and that is worth walking through, because it is the part nobody selling a study will tell you.

A ground-up apartment building does have some short-life basis: appliances, flooring, cabinetry, site work. But far less than a mobile home park, where pads, roads and utility lines make up most of the cost. The accelerated deduction here is modest to begin with. Then two things shrink what is left.

First, the §469 passive-loss rules. A passive LP cannot use accelerated losses against wages, a salary, or other outside income. The losses are suspended, they pile up through the build and lease-up, and they sit unused until the deal sells. On this deal the suspended balance reaches about $2.5M before it releases at exit. Accelerating depreciation for an investor who cannot deduct it now mostly just moves paper around.

Second, recapture rate conversion. Straight-line building depreciation comes back at exit as unrecaptured §1250 gain, capped at 25%. Cost seg reclassifies part of that basis into 5, 7 and 15-year property that recaptures as §1245 ordinary income, up to 37% plus add-ons. For a deal that sells well above basis, like this one, you would be converting a 25% exit rate into an ordinary one, in exchange for a deduction you could not use along the way. Run it both ways in the engine and the study does not clear its own fee for this buyer on a taxable sale. So we said skip it.

That answer is not universal, and that is the point. Change the buyer or the asset and it flips. A real estate professional who can deduct the losses in the year they land gets real value from acceleration. A short-life heavy asset, like a manufactured-housing park, has far more basis to accelerate and a different recapture profile. Here is the opposite case, a land-heavy park where cost seg is the whole tax story → Same advisor, opposite call, because §469 status and the asset decide what a deduction is worth. And on any taxable sale, a 1031 exchange defers the whole exit tax and carries the basis forward; on this deal that is about $3.89M deferred rather than paid.