If you’re reading this, there’s a good chance you’re not here theoretically.
You invested in a passive real estate deal. It didn’t work out. Maybe distributions stopped. Maybe you got a letter from the operator that didn’t have good news. Maybe you’ve done the math and you know the equity is gone.
That’s a specific kind of hurt. It’s not just the money. It’s the confidence hit, the second-guessing, the conversation you had to have with your spouse. The feeling that you should have known better.
I’ve been there. As an investor and as someone who has run deals. I’m not writing this from the outside.
So let’s talk about what to actually do next.
Disclaimer: This article is for informational and educational purposes only and does not constitute financial, legal, or investment advice. Any investment involves risk, and you should consult your financial advisor, attorney, or CPA before making any investment decisions. Past performance is not indicative of future results. The author and associated entities disclaim any liability for loss incurred as a result of the use of this material or its content.
Sit With It for a Minute
Before the practical steps, I want to spend a moment here.
When a deal doesn’t work out, there’s a specific kind of hurt that comes with it. It’s not just the money. It’s the confidence hit. The second-guessing. The replaying of the moment you decided to invest. Maybe the conversation you had to have with your spouse. The feeling that you should have known better. Or that someone else should have done better by you.
All of that is real. And I don’t want to rush past it.
I’ve felt it myself. As an investor who has put money into deals that didn’t perform. And as someone who has run deals that didn’t perform the way I projected they would. Both experiences carry weight. There’s a version of this hurt on both sides of the table. And I’ve sat on both sides.
I’m not going to tell you the loss doesn’t matter, or that it happened for a reason, or that it’ll all work out in the end. What I can tell you is that if you’ve had a deal go sideways in the last few years, you are not an outlier. And you’re not alone in trying to figure out what to do next.
That’s what this is for.
First: Understand What You’re Dealing With
Before anything else, it helps to get honest about what category you’re in.
Is the deal struggling but still alive? Are distributions paused but the asset is still operating? Or is this a complete loss, meaning the equity is gone and there’s no realistic path to recovery?
The answer matters because it changes the tax picture significantly, and it changes the timeline for the decisions you need to make.
If you’re not sure which category you’re in, that’s the first conversation to have with the operator. Get a straight answer on the current status of the asset, the debt situation, and what the realistic outcomes are from here. You deserve clarity, even if the news isn’t good.
Get Your Documentation in Order
This is the step most people put off when they’re frustrated or disappointed. Don’t.
Pull together everything related to the investment: your original subscription agreement, your K-1s for every year you’ve been in the deal, and any investor updates or correspondence you’ve received.
Your CPA is going to need all of it. The tax treatment of a loss depends on how the deal was structured and what the final outcome looks like. The cleaner your records, the easier that conversation is going to be.
Don’t assume this gets organized for you after the fact. Start now.
Talk to Your CPA Now, Not at Tax Time
This is probably the most important step in the entire process. And it’s the one most people delay until April, when it’s already too late to plan.
Quick note before we go further: I’m not a CPA or tax professional. What follows is a framework for the conversation you should be having with your own advisor, not advice for your specific situation. Please consult a qualified tax professional before making any decisions.
How Passive Losses Work in a Real Estate Deal
When you invest passively in a real estate syndication or fund, you receive a K-1 each year showing your share of the partnership’s income or loss. Real estate almost always generates paper losses annually, mostly from depreciation. If you’ve been in a deal for several years, those losses have been accumulating on your K-1s each year.
Here’s what most investors don’t fully understand: if you don’t have passive income to offset those losses against, they don’t disappear. They become what are called suspended passive losses. They’re attached to that specific investment, sitting on the books, carrying forward year after year.
What Happens at Complete Disposition
When a passive investment is completely disposed of, meaning the investment is fully and finally over with no remaining interest or possibility of recovery, all of those suspended passive losses are released at once. Every year of accumulated paper losses that you couldn’t use before becomes available in that single tax year.
And here’s the important distinction: in the year of complete disposition, those released losses can offset not just passive income but ordinary income as well. W-2 income. Business income. Self-employment income. Essentially any income.
For a physician who has been in a deal for three, four, or five years, that number can be significant. And it can create a meaningful tax offset in what is otherwise a very difficult financial year.
That’s not a silver lining in the cheerful sense. The money is still gone. But it’s a real financial consequence worth understanding and planning around before the tax year closes.
What Your CPA Needs to Figure Out
A few specific things your CPA will need to work through with you.
What is your adjusted basis in the investment? Every year of paper losses you’ve already taken has likely reduced your basis, which affects how the final loss is calculated.
Does this qualify as a complete disposition in the year you’re claiming it? The IRS requires the loss to be truly final. If the deal is still technically alive, even in a distressed state, the timing of the disposition matters.
Were there any distributions or returns of capital along the way? These affect the basis calculation and need to be accounted for accurately.
If you qualify as a Real Estate Professional for tax purposes, the picture changes further still. Some physicians who have reduced their clinical hours do qualify. That’s a separate but important conversation to have with your CPA, because the implications are significant. Understanding real estate depreciation and how it affects your basis is part of that picture.
None of this is simple. Which is exactly why the conversation needs to happen now, while there’s still time to make decisions, not during filing season when options are limited.
Keep Tracking Your K-1s, Even on Deals That Aren’t Performing
This one surprises people.
Even in a deal that has stopped distributing cash, your K-1 may still be showing paper losses from depreciation each year. Those losses are real. They’re accumulating. And depending on your overall passive income picture, they may be available to offset gains from other investments that are performing.
A lot of investors stop paying attention to K-1s on a deal that’s underwater because they don’t want to look at it. Understandable. But your CPA needs those numbers to give you an accurate picture of what’s available to you now and in future years.
Stay on top of them.
Do a Post-Mortem
This is the step most people skip. It’s also the most valuable one for everything that comes after.
And I want to be clear about what I mean by this. Not a blame exercise. Not a way to punish yourself for a decision you made with the information you had at the time. A post-mortem is just an honest look at what happened, specific enough that it actually changes how you invest going forward.
I do this myself after every deal that doesn’t go the way I planned. And the answers aren’t always comfortable. I’ve looked back at deals and realized I was too optimistic about projections, too optimistic about timelines, too willing to assume there was enough cushion if conditions changed. Those are my lessons to own.
You’ll have your own version of that exercise. And the answers will be specific to your situation.
A few questions worth sitting with and writing down.
What was the original thesis for this investment, and what had to be true for it to work? Where did reality diverge from those assumptions?
Was this primarily driven by market conditions, deal structure, or something specific to how this particular investment was set up? Understanding which category you’re in changes what you look for the next time you’re evaluating a deal.
What would you look at differently next time? Not in a general sense. Specifically. What question would you ask that you didn’t ask before?
There are no perfect answers here. Some of what happened was outside anyone’s control. Some of it wasn’t. The point isn’t to arrive at a verdict. It’s to leave this experience with something you can actually use.
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A Note on Market Cycles
Markets go through cycles. They always have. The questions you know to ask now, about debt structure, about what happens if the exit takes longer than projected, about where your capital sits in the capital stack: you didn’t know to ask those with the same urgency before. Now you do.
That knowledge is real. It’ll serve you in the future.
The investors who come through a difficult cycle better than they went in are the ones who stayed honest with themselves about what happened. Not the ones who pretended it didn’t hurt, and not the ones who decided the whole asset class doesn’t work. Somewhere in the middle. Clear-eyed about what went wrong. Still willing to do the work to do it better.
What to Do Next
If you’re sitting with a loss right now, the path forward starts with a few concrete steps.
Get your documentation together. Talk to your CPA before tax season, not during it. Keep tracking your K-1s. Do the post-mortem and write the answers down.
You made a decision with the information you had. Now you move forward with more.
Disclaimer: I am not a CPA, attorney, or financial advisor. The information in this post is for educational purposes only and should not be construed as tax, legal, or financial advice. Please consult a qualified professional about your specific situation before making any decisions.
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Peter Kim, MD is the founder of Passive Income MD, the creator of Passive Real Estate Academy, and offers weekly education through his Monday podcast, the Passive Income MD Podcast. Join our community at the Passive Income Doc Facebook Group.
Further Reading
