top of page

What is a K-1 and How is it Used for Taxes in Private Real Estate?

Writer: Natalie PilkintonNatalie Pilkinton

K1s, also known as Schedule K-1s, are tax forms that are issued to partners in a partnership or members of a limited liability company (LLC). These forms are used to report each partner's or member's share of the partnership or LLC's income, deductions, and credits for a particular tax year.


Partnerships and LLCs are pass-through entities, which means that they don't pay taxes at the entity level. Instead, the income, deductions, and credits flow through to the partners or members, who report them on their individual tax returns. K1s are used to report these amounts to the partners or members.

K1s typically include information such as the partner's or member's share of ordinary income, rental real estate income, interest income, dividends, capital gains and losses, self-employment income, and other income or deductions.

It's important to note that the information on a K1 can be complex and may require the help of a tax professional to properly report it on an individual tax return. Additionally, K1s may have different due dates than individual tax returns, so it's important to check the specific deadline for filing K1s.

If you're an investor in private real estate, you may have come across a tax form called Schedule K-1 (Form 1065) that is issued annually for businesses operating as a partnership. As an investor in a private real estate partnership, you can benefit from certain tax advantages, such as tax deferral, tax shields, and the favorable capital gains rate paid at sale. The K-1 form plays a crucial role in reporting each individual investor's share of the partnership's earnings, losses, deductions, and credits from the business.


A partnership is a type of business entity where two or more people come together to conduct business and share profits and losses. The U.S. tax code allows for pass-through taxation for partnerships, which means that the partnership itself does not pay taxes on its earnings, but the individual partners report their share of the partnership's income or losses on their tax returns. In other words, the partnership's income and expenses flow through to the owners or partners, who then report the amounts on their personal tax returns.


The K-1 tax form is issued by the partnership to its partners to report their share of the partnership's earnings and losses for the year. The K-1 is similar to the Form 1099, which reports interest and dividends from stock investments. The K-1 form reports each partner's share of the partnership's income or loss, as well as any deductions and credits that are passed through to the partners. It also reports any contributions or distributions made during the year. For example, if a business earns a taxable income of $100,000 with two equal partners who share in the income pro-rata, each partner can expect to receive a K-1 with $50,000 of income on it. The individual investor then reports this information on his or her tax return.


It is important to note that the K-1 form does not report the fair value of the investment, but only the tax basis of the investment. Therefore, investors should not rely solely on the K-1 form to determine the value of their investment. Investors can view the actual value of their investment by logging in to their account and looking at the net asset value.


Important K-1 and Tax Filing Information for Private Real Estate Investors

Private real estate investors should keep the following in mind when filing their taxes:

Tax Basis: There are two types of basis associated with a partnership - inside basis and outside basis. Inside basis is the partnership's basis in the assets, while outside basis is the partner's basis in the LLC interest and can be different from the inside basis.


A partner's inside and outside basis begins with the original capital contribution. Over time, taxable income and additional contributions will increase the basis while depreciation, expenses, and distributions will reduce it. The outside basis is further increased by the partner's share of partnership liabilities and reduced by repayments of liabilities.


It is important for partners to keep track of the outside basis to understand the impact of certain events like the sale of a partnership interest, how much a partner may withdraw from a partnership without recognizing additional gain, and the extent to which losses can be deducted.


Losses: A K-1 may show a loss due to current year non-cash deductions such as depreciation. It is common in value-added real estate for losses to be incurred on the K-1 because these assets produce little to no income but receive the tax-deferral benefit from depreciation.

For example, let's say that our partnership had a net income of $100,000 for the year, and you are a 20% partner. Your K1 would show $20,000 of taxable income that you would need to report on your personal tax return. Additionally, your K1 would show your share of any deductions and credits, which would also impact your personal tax liability.


Disclaimer: Please note that the information presented here is for educational purposes only and should not be considered as legal or tax advice. This content is not written by a certified public accountant (CPA) or a tax professional, and it is not intended to replace the advice of a qualified professional. Every individual or entity has unique tax circumstances, and we encourage you to consult with a CPA or a tax advisor before making any tax-related decisions.


 
 
 

Comments


Makaan Black and White.png
MAKAANMANAGEMENTGROUPLOGOWHITE.png
Makaan Regional- White.png

11445,Compaq center W Dr, Bldg CCA6; Ste 200, Houston, TX 77070

Contact: 281-500-8554

Address:

Room 717, Zhongnan Magic Moon Plaza, Xuanwu District, Nanjing 

南京市玄武区中南魔力月光广场717室

Contact: +86 17368702978 

Interested in joining our team?

Email resumes to careers@makaaninvestmentgroup.com ​

Makaan Investor Registration-tux.png

Our offerings under Rule 506(c) of Regulation D are for only accredited investors who meet the definition of an accredited investor as described by SEC guidelines. This is not an offer for the sale of securities.  The sale of any securities is only made through a private placement memorandum after the potential investor qualifies for the placement of the investment.  Any offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time before notice of its acceptance given after the qualification date. A person's indication of interest involves no obligation or commitment of any kind on behalf of the Company.

Investing involves risk, including loss of principal. Past performance does not guarantee or indicate future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. While the data we use from third parties is believed to be reliable, we cannot ensure the accuracy or completeness of data provided by investors or other third parties. Neither Makaan Investment Group nor any of its affiliates provide tax advice and do not represent in any manner that the outcomes described herein will result in any particular tax consequence. Offers to sell, or solicitations of offers to buy, any security can only be made through official offering documents that contain important information about investment objectives, risks, fees and expenses. Prospective investors should consult with a tax or legal adviser before making any investment decision.

  • Facebook
  • LinkedIn
  • Instagram

© 2020 by Makaan Investment Group - All Rights Reserved 

bottom of page