SS97: What is a K-1 Form and How is it Used in Real Estate?

SS97: What is a K-1 Form and How is it Used in Real Estate?

Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is a K-1 form and how is it used in real estate?

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Talking Points:

  • I am not a CPA; speak to one before making any investment decisions.
  • The Schedule K-1 is an Internal Revenue Service (IRS) tax form that is issued each year for an investment in a partnership; like a real estate syndication. Investors will receive 1-K1 per partnership, annually.
  • S tax code, in certain cases, allows for the use of pass-through taxation. In other words, 100% of the income and expenses flow through the partnership to the owners and partners. This shifts the liability from the entity/the partnership to the individual partners who have an interest in it. The K-1 tracks the partner’s basis in the business.
    • Pass-through taxation is very good for real estate investors; because of the favorable tax treatment it receives from the US government; most notably, is the ability to defer taxes into the future; and sometimes forever.
  • The K-1 reports each partner’s share of the partnership’s earnings, losses, deductions, and credits. It is important to note that the K-1 DOES NOT report the fair value of the investment; it simply reports the tax basis of the investment. For example; a business earns $200,000 of taxable income within a given year; each partner would receive a K-1 showing $100,000 of income on it.
  • Taxable income will increase the basis however; expenses and depreciation will decrease the basis. If there are additional contributions to the partnership; this will also increase the basis.
  • It is possible for K-1s to show a loss and it is normal for K-1s to show a loss with value-add real estate investments. This is because the income that is generated from these assets is deferred because of depreciation, and depreciation is a non-cash deduction.
    • A simple example would be a property that generates $100,000 worth of net operating income but has a depreciation deduction of $300,000. The business would report a net loss of $200,000 and if there were 2 equal partners; each partner’s K-1 would show a loss of $100,000.
    • The depreciation reduces the taxable income. The property made $100,000 but they are deferring taxes on this income with the depreciation deduction.
  • K-1s are usually disturbed by general partners in March or April of each year. However; it is normal for K-1s to be distributed much later. It is common for partnerships and investors to file extensions; especially if they receive a number of K-1s each year. It is best to alert your accountant; sooner than later, if you believe you will need an extension.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is a K-1 form and how is it used in real estate?

Charles:
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Charles:
I’m not a CPA, so speak to one before making any investment decisions. The Schedule K-1 is an Internal Revenue service IRS tax form that is issued each year for an investment in a partnership like a real estate syndication. Investors will receive one K one per partnership annually. If you invest into a fund, you usually will just get one K one for the whole fund. Now, US tax code in certain cases allows for the use of pass through taxation. In other words, 100% of the income and expenses flow through the partnership to the owners and partners landing on the owners and partners tax returns. This shifts the liability from the entity, the partnership to the individual partners who have an interest in it. The K one tracks the partner’s basis in the business. Now, pasture taxation is very good for real estate investors because of the favorable tax treatment it receives from the US government. Most notably is the ability to defer taxes into the future and sometimes forever.

Charles:
The K one reports each partner’s share of the partnerships, earnings, losses, deductions, and credits. It is important to note though that the K one does not report the fair value of the investment. It simply reports that tax bases of the investment. For example, a business with two equal partners earns $200,000 of taxable income within a given year. Each partner would receive a K one showing $100,000 of income on it. Taxable income will increase the basis. However, expenses and depreciation will decrease the basis if there are any additional contributions in the partnership. This will also increase the basis it is in. It is possible for K one s to show a loss, and it’s normal for K one s to show a loss with value add real estate investments. This is because the income that is generated from these assets is deferred because of depreciation. And depreciation is a non-cash deduction.

Charles:
So a simple example would be a property that generates $100,000 of net operating income, but it has its depreciation deduction of $300,000. The business would report a net loss of $200,000, and if there are two equal partners each partner’s K one would show loss of $100,000. The depreciation reduces the taxable income. The property property made $100,000, but they are deferring taxes on this income with the depreciation deduction. K one s are usually distributed by general partners in March or April of each year. However, it’s normal for K one s to be distributed much later. It is common for partnerships and investors to file extensions, especially if they receive a number of K one s each year. It is best to alert your accountant sooner than later if you believe you’re gonna need an extension. So I hope you enjoyed. Please remember, rate, review, subscribe, so make comments and potential show topics at globalinvestorspodcast.com. Look forward to two more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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