What is a K-1 tax form?
A K-1 tax form is the schedule a pass-through entity gives each owner to show that owner’s share of the year’s income, deductions, gains, losses and credits. The entity itself usually pays no federal income tax. You pay it, or use the losses, on your personal return.
There are three versions. Real estate syndications and most apartment partnerships are LLCs or limited partnerships taxed as partnerships, so you will almost always see the Form 1065 version. The other two come from S corporations and from estates and trusts.
| Form | Who issues it | Where owners usually report it |
|---|---|---|
| Schedule K-1 (Form 1065) | Partnerships and LLCs taxed as partnerships, including most real estate syndications | Schedule E Part II, plus Schedule D, Form 8582 and other forms as the codes direct |
| Schedule K-1 (Form 1120-S) | S corporations | Schedule E Part II and related forms |
| Schedule K-1 (Form 1041) | Estates and trusts | Schedule E Part III and related forms |
Why real estate investors get a Schedule K-1
You get a Schedule K-1 because the entity that owns the property files Form 1065, an information return, and passes its tax results through to the partners. Each partner’s slice follows the partnership agreement. In many years that slice is your ownership percentage, but preferred returns and promote splits can change the allocation, especially in the year of a sale.
For a passive investor this setup has one big benefit. Depreciation on the building flows through to you, which is why many apartment investors report a tax loss in early years while still receiving cash. It also has one cost: you can’t finish your return until the K-1 shows up.
K-1 vs 1099: how the two forms differ
A 1099 reports money that was paid to you, while a K-1 reports your share of an entity’s tax results whether or not any cash reached you. That difference explains most of the confusion new partners have with the form.
A bank sends a 1099-INT for interest it paid. A brokerage sends a 1099-DIV for dividends. Each one is a record of a payment. A partnership K-1 works the other way around. The IRS partner instructions say you may be liable for tax on your share of partnership income whether or not it is distributed. So a partner can owe tax on income that stayed in the property’s reserve account, and can show a loss in a year when cash did arrive.
The timing differs too. Most 1099s reach you by mid-February. For the 2025 tax year, the IRS deadline for brokers to furnish consolidated 1099 statements was February 17, 2026. A K-1 can come as late as mid-September when the partnership extends its return, and it often runs to several pages of codes and footnotes.
| Point of comparison | Form 1099 | Schedule K-1 (Form 1065) |
|---|---|---|
| What it reports | A payment made to you | Your share of income, losses, deductions and credits |
| Tied to cash received? | Yes | No; distributions are shown separately in box 19 |
| Who sends it | Banks, brokers, clients, lenders | Partnerships and LLCs taxed as partnerships |
| Usual arrival | Late January or February | March, or September if the partnership extends |
| Can show a loss? | Rarely | Often, in the early years of a rental property |
How to read a K-1 for a rental property
Most of a rental K-1 is blank. The boxes below carry nearly all the numbers you or your CPA will use. The IRS Partner’s Instructions for Schedule K-1 (Form 1065) explain each code, and the 2025 instructions added separate codes in box 19 for different kinds of distributions.
| Item or box | What it shows | Why it matters to you |
|---|---|---|
| Item K | Your share of the partnership’s liabilities: recourse, qualified nonrecourse and nonrecourse | Debt adds to your tax basis, which lets you deduct losses and receive distributions without current tax |
| Item L | Your capital account on the tax basis method: beginning balance, contributions, income or loss, withdrawals, ending balance | Tracks your equity, but the IRS says it may not equal your adjusted basis |
| Box 1 | Ordinary business income or loss | Usually small or blank for a pure rental partnership |
| Box 2 | Net rental real estate income or loss, after depreciation and interest | The main number for most apartment investors; it is generally passive |
| Box 5 | Interest income, often from reserves held in a bank account | Reported as portfolio income, not passive income |
| Box 9a and 9c | Net long-term capital gain, and unrecaptured section 1250 gain | Shows up mainly in a sale year; 9c is taxed at up to 25% |
| Box 19 | Distributions, with codes for cash, property and other types | Reduces your basis; it is not the same as taxable income |
| Box 20, code Z | Section 199A information | Used to figure the qualified business income deduction, if the rental qualifies |
When K-1s arrive in 2026 and 2027
A calendar-year partnership must file Form 1065 and send K-1s by the 15th day of the third month after year end, or six months later if it files Form 7004 for an extension. Many real estate partnerships use the extension. They wait on final property books, cost segregation studies or K-1s from lower-tier entities.
If your K-1 has not arrived by early April, file Form 4868 to push your personal return to October 15. That extends the time to file, not the time to pay, so your CPA may suggest an estimated payment by the April date.
| Tax year | Partnership K-1 due | With extension | Your Form 1040 due | With extension |
|---|---|---|---|---|
| 2025 (filed in 2026) | March 16, 2026 (March 15 was a Sunday) | September 15, 2026 | April 15, 2026 | October 15, 2026 |
| 2026 (filed in 2027) | March 15, 2027 | September 15, 2027 | April 15, 2027 | October 15, 2027 |
Distributions versus taxable income
Your distributions and your taxable income are two separate numbers, and they rarely match. Distributions are cash the entity pays you. Taxable income is what box 2 and the other boxes say you must report.
A property can pay cash every quarter while the K-1 shows a loss, because depreciation lowers taxable income without spending any cash. The reverse happens too. When a partnership uses cash to pay down loan principal or build reserves, it can report taxable income while paying out less.
Distributions are generally not taxed when you receive them, as long as they don’t exceed your basis in the partnership. They reduce your basis instead. Cash distributed beyond your basis is generally treated as gain.
Why your K-1 shows a loss, and the 2025 tax law
Most apartment K-1s show a loss in the first years because of depreciation, and the 2025 tax law made those losses larger for new purchases. The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. The IRS issued interim guidance on it in Notice 2026-11.
Bonus depreciation applies to shorter-life property such as appliances, flooring, cabinets, parking lots and landscaping, which a cost segregation study pulls out of the building cost. The building itself is still depreciated over 27.5 years. When a partnership buys a property and does a study in the same year, the first K-1 can show a loss larger than the cash you put in.
For most passive investors those losses are passive. They offset passive income from other rentals or partnerships, and any excess carries forward to later years. The special $25,000 rental allowance does not help here, because the IRS says limited partners can’t actively participate. Unused passive losses are generally freed up when the partnership sells the property and you dispose of your interest.
The four limits on K-1 losses
A loss on your K-1 has to clear four separate tests before it reduces your tax, and the IRS applies them in a fixed order. The Partner’s Instructions for Schedule K-1 list them as the basis limit, the at-risk limit, the passive activity limit and the excess business loss limit.
For most passive apartment investors, the first two rarely bite. Your share of the property loan usually counts toward both basis and the amount at risk, because IRS Publication 925 treats qualified nonrecourse financing secured by real property as an amount at risk. The passive activity limit is the one that usually holds the loss back. A loss that fails any test isn’t lost. It carries forward to a later year.
| Order | Limit | What it asks | Where it is figured |
|---|---|---|---|
| 1 | Basis | Do you have enough basis, including your share of debt, to absorb the loss? | Your own basis records; the partnership does not track it for you |
| 2 | At-risk | Is the money you could lose, including qualified nonrecourse real estate debt, at least as large as the loss? | Form 6198, At-Risk Limitations |
| 3 | Passive activity | Do you have passive income to offset, or did you dispose of the activity? | Form 8582 |
| 4 | Excess business loss | Do total business losses go past the yearly limit for noncorporate taxpayers? | Form 461 |
The section 199A deduction on rental K-1s
Some rental K-1s carry information for the qualified business income deduction, which lets eligible taxpayers deduct up to 20% of qualified business income. You’ll find it in box 20 under code Z, often with a supporting statement.
The deduction only applies if the rental rises to the level of a trade or business. The IRS offers a safe harbor in Revenue Procedure 2019-38. It requires separate books for each rental enterprise and 250 or more hours of rental services a year, with time logs. Older enterprises can meet the hours test in three of the past five years. A partnership can rely on the safe harbor itself, and the K-1 statement usually tells you whether it did. If the K-1 shows a loss, there is usually no deduction that year, and the loss can reduce the deduction in later years.
Return of capital, basis and capital accounts
Return of capital means cash that gives back money you put in, as opposed to a return on that money. The operating agreement’s waterfall decides how each distribution is labeled, and the label matters. Returning capital often lowers the balance on which a preferred return is figured.
Your capital account in item L starts with your contribution, goes up with allocated income and down with allocated losses and distributions. Your tax basis is a different figure because it also includes your share of the partnership’s debt from item K. Neither one tells you what your interest would sell for today. Your CPA usually tracks basis year to year from your K-1s.
Refinance distributions
A refinance distribution is generally not taxed when you receive it, because it is borrowed money, as long as you have enough basis. Your share of the new, larger loan raises your basis, which is why these payouts usually pass through without current tax.
The tax comes later. The payout lowers your basis, so more gain shows up when the property sells. A refinance also adds leverage to the property, and the waterfall may treat the payout as a return of capital. Read how your operating agreement handles it before you count on one.
What your K-1 shows in the year the property sells
In a sale year your K-1 reports your share of the gain, and different parts of it are taxed at different federal rates. Gain from bonus-depreciated short-life items is generally taxed as ordinary income. Gain equal to the building’s straight-line depreciation is unrecaptured section 1250 gain, taxed at up to 25%. The rest is long-term capital gain at 0%, 15% or 20%.
Many investors also owe the 3.8% net investment income tax on the gain if their modified adjusted gross income is above $200,000 single or $250,000 married filing jointly. Suspended passive losses from earlier years are usually released in the same year and can soak up part of the gain.
Worked example: one investor’s K-1
Here is a simplified, hypothetical case to show how the numbers connect. Maria puts $100,000 into an LLC that buys a 120-unit building for $20,000,000 with a $13,000,000 loan. She owns 2% of the LLC.
Her starting basis is $360,000: the $100,000 she contributed plus her 2% share of the loan, $260,000, shown in item K. In year one the LLC closes on the property after January 19, 2025, runs a cost segregation study and takes 100% bonus depreciation on the short-life items. Maria’s box 2 shows a loss of $38,000. Box 19 shows $4,000 of cash distributions.
Her basis drops to $318,000 ($360,000 minus $38,000 minus $4,000). Her tax-basis capital account in item L ends at $58,000 ($100,000 minus $38,000 minus $4,000), because it leaves out debt. She has no other passive income, so the $38,000 loss carries forward. The $4,000 of cash is not taxed this year because it is well below her basis.
Year two looks different. Most of the bonus depreciation was used up in year one, so box 2 shows a smaller loss of $6,000 while box 19 again shows $4,000 of cash. Her basis falls to $308,000 and her capital account to $48,000. Her suspended passive loss grows to $44,000. Nothing on either K-1 says what her interest is worth. It only tracks tax results.
If the LLC later sells, her K-1 for that year shows her share of the gain split into ordinary income, unrecaptured section 1250 gain and long-term capital gain. Her carried-forward losses are then released against it.
State K-1s and nonresident filings
Rental income is generally taxed by the state where the property sits, so a K-1 from an out-of-state building can create a filing duty there even when your share is small or a loss. Look for the state schedules attached to the K-1.
Some partnerships file composite returns or withhold state tax for nonresident partners, which can save you a separate filing. Your home state usually taxes the same income and often gives a credit for tax paid to the other state. A loss year may still be worth filing so the loss carries forward in that state.
K-1s in private real estate offerings
If you invest in a syndication, the K-1 is the main tax document you will get each year, along with the sponsor’s periodic reports on occupancy, rents, capital projects and distributions. Ask the sponsor when K-1s usually go out and whether the partnership tends to file on extension.
Most syndications are open only to accredited investors, and the rules for Rule 506(b) and Rule 506(c) offerings differ on advertising and on how investor status is checked. Any offering is made only through official offering documents to eligible investors.
What to check when your K-1 arrives
Check a new K-1 against your own records before you hand it off, because small errors carry into every later year. A ten-minute review catches most of them.
- Your name, address and taxpayer ID in Part II, and whether you are listed as an individual, trust, IRA or LLC.
- Your ownership percentages in item J, compared with your subscription documents.
- The beginning capital account in item L, which should match the ending balance on last year’s K-1.
- Capital contributed during the year, if you funded a capital call or bought in late.
- Distributions in box 19, compared with the deposits in your bank or IRA account.
- Your share of liabilities in item K, which moves with refinances and loan paydowns.
- The state schedules, so you know where you may need to file.
- The footnotes and supplemental statements, which often hold the 199A and sale-year details.
What to do if your K-1 is wrong or corrected
If you think your K-1 is wrong, ask the partnership for a corrected Schedule K-1 rather than changing the numbers yourself. The IRS says not to alter your copy.
If you decide to report an item differently from the partnership anyway, you generally must attach Form 8082 to your return to disclose the difference, and skipping it can lead to an accuracy-related penalty. When a corrected K-1 arrives after you file, your CPA will usually prepare an amended return using the new figures.
What to give your CPA
Give your CPA every K-1 with all of its supplemental statements and state schedules, plus your distribution records and the subscription documents that show what you contributed. Prior-year K-1s matter too, because basis and suspended losses build from year to year.
