By Roger Ledbetter, CPA. Updated September 2026.

A sponsor closes a $20 million apartment deal and takes a 2% acquisition fee at closing. That $400,000 is ordinary income to the sponsor this year. The investors who paid for it deduct most of it over the next 27.5 years.

That gap shows up in every fee a syndication pays. The sponsor who receives a fee reports ordinary income, usually with self-employment tax on top. On the paying side, the answer depends on what the fee bought. It decides when investors see the deduction and, for one type of cost, whether they ever do.

Where does each fee land on the partnership return?

The table below covers the partnership side. On the sponsor side, every one of these is ordinary income.

Two rows surprise people most.

The acquisition fee. The fee is part of what the partnership paid for the building. It goes into basis with the purchase price. Split the $400,000 fee 80/20 between building and land, and investors get about $11,600 of depreciation a year from it. The sponsor owes roughly $148,000 of federal income tax on the same fee in year one at a 37% rate. A cost segregation study speeds this up. The study spreads the fee across asset classes along with the rest of the price, and the share that lands in 5-, 7- and 15-year property qualifies for bonus depreciation in year one.

The disposition fee. When the building sells, the fee reduces the partnership's gain. On a $26 million sale, a 1% fee is $260,000 of ordinary income to the sponsor. The investors save tax on that same $260,000 at capital gain rates.

The promote is taxed differently because it is a share of partnership profit and keeps the character of the gain. Our post on waterfalls, preferred returns, and the promote covers how.

Why do syndication costs get no deduction?

Section 709 splits the cost of starting a partnership into two piles.

The first pile is organization costs. That is the money spent creating the entity: drafting the operating agreement, state filing fees, setting up the books. The partnership deducts up to $5,000 of these in its first year and amortizes the rest over 180 months. The $5,000 shrinks dollar for dollar once organization costs pass $50,000.

The second pile is syndication costs, the money spent selling interests to investors. This pile covers the private placement memorandum, securities filings, placement fees, broker commissions, and investor marketing. These get no deduction and no amortization. They sit on the balance sheet for the life of the deal. The IRS denies the deduction even when the partnership winds up.

The trouble starts with the legal bill. The securities attorney usually sends one invoice covering formation, the offering, and sometimes the purchase. Post the whole thing to syndication costs and the organization piece loses its deduction. Post it all to legal and professional fees and the return deducts costs the IRS would disallow on exam.

What should a sponsor do at closing?

Ask the attorney to break the invoice into four lines before you pay it:

• Entity formation (organization costs)

• Offering documents and securities filings (syndication costs)

• Purchase contract and title work (added to the property's basis)

• Loan documents (amortized with the loan)

Then code the fees on the closing statement the same week, using the table above. It takes about an hour. Untangling it after two returns have gone out takes far longer, and the correction reaches every investor.

If your fees run through a separate management company, see the management company every syndication sponsor should own. For the rest of the deal, from depreciation to exit, start with our guide to real estate syndication taxes.

About Baldridge Ledbetter

Baldridge Ledbetter is a CPA firm in Houston that serves real estate syndicators, LLC owners, and profitable business owners. Our work covers real estate tax, entity structure across multiple LLCs, and small business tax planning for pass-through owners. We think like business owners because we are business owners. If your current CPA only shows up at tax time, reach out here.