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Understanding Schedule K-1s

Reporting investments for tax purposes is typically a task best left for CPAs. For example, most people find it challenging to identify line items like net rental real estate income and an investment portfolio's gains. 


To make things easier, we've broken down one tax form that every syndicator should know, Schedule K-1's. This form is required to report investments and income on items such as investment property.


What is a Schedule K-1?

A Schedule K-1 is a federal tax document provided by the IRS and issued by entities such as Partnerships, S corporations, and Trusts and Estates to report earnings, losses, and dividends. Under the United States Internal revenue code, these institutions can utilize the "pass-through" taxation method to shift income liability from the entity to individuals that benefited from any profits gained on the investment. 


Commercial real estate investments as part of a group or syndication also require that you file a Schedule K-1. The IRS bases this requirement on the equity contribution or agreements between the investor and the general partner (GP). In addition, the entity must show net operating profits or losses in its business.


There are three types of Schedule K-1's


Partnership Schedule K-1's

When two or more people form a partnership to conduct business for a profit, the owners must distribute all earnings to their partners. The partners are then responsible for paying taxes on the income.


Partnerships are considered "pass-through" entities, meaning the business itself does not pay taxes; the partners do. In this case, each partner receives a K-1 statement that reports their earnings, deductions, and credits. 


For example: if a business generates $600,000 in taxable income under a partnership agreement involving six equal partners, each partner will receive a K-1 indicating the earnings of $100,000 (or 1/6 of the total taxable income) to report to the IRS. This tax condition is also proper for investments in limited partnerships and some ETFs.


S Corporation Schedule K-1

Identical to Partnerships, S Corporations file K-1's and accompany them with the Form 1120-S every year. The owners of the S-Corp are then responsible for distributing K-1's to their stockholders, who pay taxes as partners of the business. The stockholders are then required to report their income, credits, and deductions to the IRS. Note: this applies to companies with fewer than 100 stockholders.


Trust and Estate K-1 Forms

Trusts and Estates are entirely different from Partnerships and S Corporations in filing taxes. In some cases, a trust will pay income tax instead of shifting the responsibility to the beneficiaries.


There are some instances where a trust or estate may record pass-through income on the tax returns of their beneficiaries. In this case, the beneficiary receives a Schedule K-1, exhibiting any taxable gain.


What To Know Before You File as an Investor

Investors who are also equity holders in an entity can expect to receive a pro-rata share of the entity's profits and losses. For example, if an LLC submits a tax return, all deductions and income will be claimed by the entity. In this case, a form K-1 will be issued to the investor by the company. Preparation of the investor's tax return would reference that K-1.


Distributions listed on Form K-1's are generally not taxable, but any amount distributed, on the other hand, could reduce an investor's basis and be treated as a return of capital.


Whether you're an experienced or inexperienced investor. To fully comprehend how rental real estate investments affect your tax situation, you should always speak with a CPA.


Tools that Help

As a general partner overseeing an investment portfolio, managing investor information on spreadsheets, shared folders, and email may present an unnecessary risk.  Especially when distributing sensitive reporting to your CPA and investors. InvestNext’s integrated investment management software allows you to organize and securely share tax forms and other investment documents with your investors. Click here for more information on how InvestNext streamlines tax reporting, as well as takes the hassle out of K-1 distributions.



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When you visit websites, they may store or retrieve data in your browser. This storage is often necessary for the basic functionality of the website. The storage may be used for marketing, analytics, and personalization of the site, such as storing your preferences. Privacy is important to us, so you have the option of disabling certain types of storage that may not be necessary for the basic functioning of the website. Blocking categories may impact your experience on the website. More Infomartion
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These items are required to enable basic website functionality.
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These items are used to deliver advertising that is more relevant to you and your interests. They may also be used to limit the number of times you see an advertisement and measure the effectiveness of advertising campaigns. Advertising networks usually place them with the website operator’s permission.
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These items allow the website to remember choices you make (such as your user name, language, or the region you are in) and provide enhanced, more personal features. For example, a website may provide you with local weather reports or traffic news by storing data about your current location.
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