Understanding the K-1

If you have ever talked to a lead investor on a real estate deal you will likely hear the term K-1 used. You might hear “our limited partners will have some potential tax benefits; every investor gets a K-1”. That sounds great and all, but you might be asking “what is a K-1?”

A K-1 (Schedule K-1), also known as Form 1065, is a form created by the IRS and is used to track a Partner’s share of earnings or losses, deductions, credits, etc. A K-1 is primarily issued to taxpayers who have invested in limited partnerships but can also be issued for some ETF’s (exchange traded funds). A K-1 is also used for S-Corporations with under 100 stockholders as well as trusts and estates that have distributed income.

In most real estate syndications and funds, you will be issued a K-1 as a limited partner. There are some rare instances when a form 1099 is issued. If you are issued a 1099, then you may not have the same rights and benefits as other partnerships. This is very important to ask when you are investing in real estate. The difference could cost you thousands in lost tax deductions. So, make sure you ask if you will receive a K-1 or a 1099 when you invest.

Partnerships are generally not subject to income tax, the individual partners (including limited partners) are subject to being taxed for their share of the partnership income, even if the income is not distributed. This is a normal occurrence, and the great part of real estate is there are generally tax deductions to off set the income gains.

One thing to note about a K-1 is they are very complex documents to prepare, so these are typically the last tax documents you will receive as you get ready for filing your taxes. If you are used to filing extensions for your taxes, then this may not affect you.

As always, make sure to consult your tax advisor for items like this as we do not give legal, accounting, or other professional advice.