Updated · Part of the CRE investment glossary
What a K-1 reports
Most real estate syndications and funds are LLCs or limited partnerships taxed as partnerships. A partnership generally pays no federal income tax itself. It files Form 1065, and its income, deductions and credits pass through to the partners, each of whom gets a Schedule K-1 showing their share.
The share follows the allocation rules in the operating agreement, not the cash. Investors report their K-1 amounts on their own returns even if the deal distributed nothing, and distributions are not themselves income: they generally reduce the partner’s basis. Each investing entity gets its own K-1, so an investor who holds through an IRA and a trust receives two.
When K-1s arrive
Form 1065 is due on the 15th day of the third month after the tax year ends: March 15 for a calendar-year partnership. Form 7004 gives an automatic six-month extension, to September 15, and the partnership must furnish K-1s by the return’s due date, including extensions.
Extensions are common, because a partnership return needs closed books, final allocations and sometimes K-1s from partnerships it invests in. Individual returns are due April 15, so many real estate investors extend their own return as well.
| Filing | Due date | With extension |
|---|---|---|
| Partnership return (Form 1065) and K-1s | March 15 | September 15 (Form 7004) |
| Individual return (Form 1040) | April 15 | October 15 (Form 4868) |
The parts real estate investors read first
A K-1 has dozens of lines. For a typical rental property deal, these carry most of the information:
- Part II, item J: the partner’s share of profit, loss and capital.
- Part II, item K: the partner’s share of partnership liabilities, which can affect basis and at-risk amounts.
- Part II, item L: the capital account analysis, reported on the tax basis method.
- Box 2: net rental real estate income or loss, usually the main operating number.
- Box 9c: unrecaptured section 1250 gain, which usually appears in the year of a sale.
- Box 19: distributions received during the year.
- Box 20: other information, with coded items your CPA uses, such as section 199A details.
Why a K-1 can show a loss when you received cash
Depreciation is a deduction with no cash cost, so a property can pay distributions and still report a tax loss. Cost segregation studies and bonus depreciation can make early-year losses larger. Whether an investor can use the loss this year depends on basis, at-risk and passive activity rules; that is a question for their CPA.
Example: a partnership with an interest-only loan earns $600,000 of NOI, pays $350,000 of interest and deducts $400,000 of depreciation. It distributes $200,000 of the $250,000 cash flow. An investor who owns 5% sees a loss in box 2 and cash in box 19.
| Line | Partnership | 5% partner |
|---|---|---|
| Net operating income | $600,000 | $30,000 |
| Interest expense | ($350,000) | ($17,500) |
| Depreciation | ($400,000) | ($20,000) |
| Net rental real estate loss (box 2) | ($150,000) | ($7,500) |
| Distributions (box 19) | $200,000 | $10,000 |
Common mistakes
These cause most amended returns and investor questions:
- Filing a personal return before every K-1 has arrived, then amending.
- Treating distributions as income, or the capital account in item L as the investor’s tax basis. They are different numbers.
- Forgetting state filings: a property in another state can create a nonresident filing duty, or a composite return the partnership files.
- Assuming an IRA owes no tax: debt-financed real estate can produce unrelated business taxable income. Ask the custodian and a CPA.
- Ignoring an amended K-1. The amended form replaces the original and the investor’s return may need to change.
Getting K-1s out on time
For the sponsor, the K-1 is the last step of the year’s records. The CPA needs a trial balance, every contribution and distribution with its date, ownership changes and transfers, and the details behind depreciation. When capital accounts already tie to the ledger, the CPA starts from reconciled data and the K-1s are less likely to slip.
Primary sources
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.