What Is a K-1 And Why Is It Important For You To Know As An Investor?

Do you know about K-1’s? What is a K-1? Why is it important for you to know about it as an investor? The Schedule K-1, also known as form 1065, is a tax form from the IRS. This K-1 form is issued every year to businesses that operate as partnerships.  More specifically, and the reason we’ve issued them, is because they are provided to investors in private real estate syndications. The tax code here in the USA allows for the use of certain pass-through taxation for investments like that in private real estate. This simply means that all income and expenses go through the partnership to the owners or partners.

K1 Provides Great Tax Benefits

This is great for tax purposes. Why? Because tax deferral, tax shields, and a favorable capital gains rate that’s paid at sale are huge advantages of investing in private real estate. The K-1 tax form is going to report the share of each individual investor’s share of the earnings from the partnership. It will also list the losses, deductions, and credits from the business. Furthermore, the K-1 is also going to include all contributions or distributions made over the past year. Something similar, that you may be more familiar with, is the 1099 tax form. Similar to K-1, the 1099 reports interest and dividends from investments like the stock market.

Each investor then goes on to report this information on their tax return. As an example, if your business earns taxable income of $60,000 with four equal partners who share the income pro-rata, each partner can expect a K-1 with $15,000 of income on it.

YYouyPrivate Real Estate Investors Should Remember The Following

Valuation: As intricate as the K-1 can be, it doesn’t report the fair value of the investment. It simply reports the tax basis of the investment.

Tax Basis: There’s only two types of basis when we’re discussing a partnership as mentioned above. The inside basis and the outside basis. Inside refers to your basis in the assets of the partnership and outside refers to your basis in the LLC interest. The outside basis can be different than the inside basis.

The Inside And Outside Basis

Your inside and outside basis starts with the original capital contribution. As time goes on, taxable income and extra contributions will result in an increase in the basis. On the other hand, depreciation, expenses, and distribution will decrease it. The outside basis is increased further by the share of the partner’s liabilities and is reduced by the repayment of liabilities.

As a partner, it’s important to keep track of the outside basis. This way you can understand the impact of particular events. Events such as the sale of one of the partnership interests, how much a partner might withdraw from the partnership without recognizing additional gain and the extent to which losses can be deducted.

We’ve Made Understanding Your K-1 Easier

We’ve made understanding the K-1 easier. Now, instead of learning about Schedule K-1 on your own, you can watch our new video about K-1’s with Angie Aki, the founder of Ohana Investment Partners. Alongside Angie is Sean, her personal and business CPA. To garner a better understanding of a K-1, be sure you watch the video up above.

Are You Ready To Invest?

Own your future by investing passively in real estate. You deserve to take charge of your future. Stop limiting yourself because you don’t have the time, know-how or energy to take on something new. At Ohana Investment Partners in Orlando, Florida, we’ve done the heavy lifting for you through training, experience building and property vetting. We work with you to help you achieve your goals, in whatever season of life you’re in.

Ready to get started with real estate investing but don’t want to take on another full-time job? I don’t blame you! With Ohana Investment Partners, passive income really is passive. Passive real estate investing is your secret to wealth without the extra stress or work. If you have any questions, please leave us a comment; or reach out to us via our website or social media channels by using the links down below in this description.