What is a K-1?
Nobody likes talking about taxes, but investors need to know about the K-1 (also known as Form 1065). This federal tax form details activities from any investments in partnership interests. A completed K-1 will list your share of taxable items from the previous year for any investments where you had an ownership stake. That includes ownership in a real estate LLC, which the IRS considers a partnership if corporation form is not selected by the taxpayer.
All investors (or “partners”) associated with the LLC have a K-1 so they know their share of earnings, losses, credits, and deductions. (Make sure you double-check all the figures on your form.) Then each investor uses their K-1 to pay taxes on income from the partnership.
Here’s how a K-1 works: Say you had an ownership stake (or membership interest) in a real estate company last year. When it’s tax time, all taxable activities generated by the partnership go on a K-1 form. If you are not managing the partnership or the LLC, you’re unlikely to participate in filling out the K-1; instead, you’re likely to receive a K-1 from the partnership filled out by someone else. You then use the information on your K-1 to fill out your regular tax return.
Here’s what else you need to know: The K-1 lists each investor’s share of the earnings, losses, credits, and deductions from their partnership. It also lists any withdrawals from income or your partnership’s capital account during the previous year. You don’t have to pay tax on these distributions; you pay tax on your share of the income generated by your real estate LLC, whether you withdrew that income or not.
K-1 case study
Say a real estate LLC has three partners and the LLC is taxed as a partnership. The company generates $300K in taxable income in the previous tax year, so each partner will be responsible for their share of that income ($100K each). The income is reflected on a K-1 sent to each partner. Partners will report such income on their tax returns.
The bottom line
The K-1 is an IRS form for investors with partnership interests, including those who have an ownership stake in a real estate LLC. Every year, the partnership submits a K-1 to all of the investors in the LLC (and the IRS), which lists earnings, losses, credits, and deductions. Each investor pays taxes on income generated by the LLC and uses their K-1 to fill out their annual tax return. The K-1 is one of the most important tax forms for real estate companies that operate as partnerships.