Whether you're a seasoned investor or just getting started in real estate, it's essential to understand the ins and outs of Schedule K-1s.
The Schedule K-1 form is the official federal tax document filed by entities like partnerships and LLCs to report each partner or LLC member's income, deductions, and credits. In other words, it says how much money you made (or lost) from your investment in the entity during the year.
K1 real estate forms can be a bit more complicated, so in this quick guide you'll learn what you need to know about them, from what they are to why they're essential and how to file them.
Let’s delve in…
What is a Schedule K-1?
The form is a tax document that reports incomes, losses, and dividends of a business's partners or S-Corporation shareholders. The IRS uses this information to calculate each individual's tax liability.
For real estate investors, Schedule K-Forms report their share of income or losses from investments in partnerships, LLCs, and other real estate investment trusts (REITs).
How to File Schedule K-Forms
Schedule K-Forms must be filed with the IRS every year. They are typically filed along with an individual's income tax return (Form).
If you're a partner in a partnership or LLC, you should receive a Schedule K-Form from the entity at the end of the year. This Form will be sent to you by mid-March to early April.
If you don't receive your Schedule K- 1 Form by this date, you should contact the entity that is supposed to send it to you. They may have an incorrect address on file, or there may be some other issue.
Once you have your Schedule K-Form, you'll need to fill out your individual income tax return and attach the K-Form to this return.
If you're filing as an S-Corporation shareholder, you'll need to file your individual income tax return and attach Schedule K-Form to this return.
It's critical to note that you should never file a Schedule K-Form alone. It must be attached to either Form or your individual income tax return.
Important K-1 and Tax Filing Information for Private Real Estate Investors
Some of the most crucial things that you need to look for when you're reviewing your K-Form:
First, you'll want to look at your income. This is the money you made from your investment in the entity during the year.
It's important to note that this income may be reported differently on your K-Form. For example, it may be listed as "distributable cash" or "net income."
The next thing you'll want to look at is deductions. This is the money that was spent by the entity on things like operating expenses, depreciation, and interest.
These deductions can reduce your tax liability.
Credits are special tax breaks that can reduce your tax liability. For example, the Low-Income Housing Tax Credit (LIHTC) is a credit investors can use in low-income housing projects.
When reviewing your K-1 real estate tax form, it's important to look at all three items: income, deductions, and credits. Understanding these items gives you a better idea of your tax liability.
You can contact a tax professional if you have questions about your K-Form or how to file it. They’ll help you understand the Form and ensure you're filing it correctly.
If you're a real estate investor or owner of pass-through entity, it’s best not to wait to get your K-Forms to get started on your income tax return. Address this as early as possible. If you fail to file your federal income tax return due to failure to receive Schedule K-1, you incur additional penalties.
Contact a tax professional if you have any questions about the form to ensure that you're correctly filing your K-Forms and avoiding any IRS penalties.