K-1

Definition

A K-1 in real estate usually refers to Schedule K-1 (Form 1065) — the IRS tax document partnerships and many LLCs use to report each partner’s or member’s share of the entity’s income, deductions, credits and other tax items. In real estate partnerships this includes rental income, depreciation, mortgage interest, property taxes, capital gains or losses and changes to capital accounts. The K-1 enables pass-through taxation: the partnership’s results flow through to each investor’s personal tax return instead of being taxed at the entity level.

Who gets a K-1?

Any partner or member in a partnership or multi-member LLC that owns income-producing real estate will typically receive a Schedule K-1 annually. Estates and trusts that distribute real-estate income use Schedule K-1 (Form 1041) for beneficiaries; S corporations use their own Schedule K-1 (Form 1120-S) for shareholders.

What information is on a real estate K-1?

• Partner/member identifying information and ownership percentage
• Share of ordinary rental income and expenses
• Depreciation and amortization allocations
• Allocated mortgage interest and property taxes
• Capital gains or losses from property sales
• Credits or tax items passed through by the partnership
• Ending capital account and any distributions

Common real-world examples

• Equal partners, rental income: A two-member LLC earns $100,000 in net rental income; each member’s K-1 shows $50,000 to report on their individual return.
• Depreciation reduces taxable income: The partnership claims depreciation that offsets rental income; the K-1 allocates each investor’s share of that depreciation deduction.
• Capital improvement and sale: Renovations increase income and basis; K-1s reflect changed income shares and the final K-1 after a sale reports each partner’s capital gain or loss and the capital-account closing.

Why the K-1 matters to investors

• It drives how much tax you report and pay on pass-through real estate income or losses.
• It shows depreciation and other deductions that may limit taxable income but also affect your tax basis and future gain/loss calculations.
• It documents changes to your capital account and distributions, which can create gain if distributions exceed your tax basis.

Important tax concepts tied to K-1s

• Basis limits: You generally cannot deduct partnership losses beyond your tax basis in the partnership; K-1 details help calculate that basis.
• Passive-activity rules: Rental real estate is often passive; passive loss rules can limit the current deductibility of losses reported on a K-1.
• At-risk rules: Some losses may also be limited by how much financial risk you have at stake in the investment.

Timing and filing practicalities

• Partnerships file Form 1065 (and provide Schedule K-1s) typically by March 15 (or the extended deadline if an extension is filed). K-1s are needed to complete individual returns (Form 1040).
• Late K-1s are common and can force investors to file for an extension or file Form 1040 with estimated figures and later amend if necessary.
• State tax rules vary — many states require K-1 information for state returns as well.

Common issues and how to handle them

• Incorrect K-1 data: Contact the partnership immediately to request a corrected K-1 (a “corrected Schedule K-1”).
• Late delivery: Consider a tax extension for your individual return or consult your tax preparer on estimated filing strategies to avoid penalties.
• Complex items: Credits, foreign items, and special allocations on a K-1 can be complex — get professional tax help if you don’t understand a line item.

Quick checklist when you receive a K-1

• Compare income and distributions to your own records and partnership statements.
• Note depreciation, passive loss, and capital gain amounts for tax-basis and loss-limit calculations.
• Share the K-1 promptly with your tax preparer or upload it to your tax software.
• Watch for corrected K-1s before filing or be prepared to amend if corrections arrive after filing.

Where to get help

Because K-1s interact with basis calculations, passive-activity and at-risk rules, and state filing requirements, many real estate investors work with a CPA or tax advisor experienced in partnership taxation. If you want a general primer on how pass-through entities report income, see this internal glossary entry: pass-through taxation, or for more on the form itself: schedule-k-1.

Short FAQ

Q: Is a K-1 a tax return? A: No — it’s an informational slip showing your share of partnership items that you use to complete your own tax return.

Q: What if my K-1 shows a loss I can’t use? A: Losses may be limited by basis, at-risk or passive-activity rules; unused losses are often suspended and can be used later when limits are removed.

Q: Are K-1s only for big investments? A: No — any partnership or multi-member LLC with taxable items will issue K-1s to its partners or members, regardless of size.

For accurate tax filing and to avoid surprises, review your K-1 carefully each year and consult a tax professional for any items you don’t understand.