Taxes are perhaps one of the most boring and painful of all topics that one can choose to discuss. That is unless you are a real estate investor! The ability of real estate to provide artificial loses to investors allows them to save tremendously on there taxes each year. How are these loses captured and recorded? The answer to this question is a form commonly known as a K1.
What is K1?
In the world of taxes, each tax paying entity rather that be an individual or a business has a number which identifies them. Although collectively called a tax identification number (TIN), it is commonly broken down to the social security number (SSN) for the individual or an employer identification number (EIN) for an organization. Every year, each organization must file their taxes by March 15th and each individual by April 15th to be in compliance with the internal revenue service (IRS). When an individual has an income through and employer they often receive a W-2 (or 1099 for self employed) which reports the income that individual has received in the specified tax year. However, a job is not the only place an individual can receive income. If said individual has investments in a company they will receive what's known as a K1 which shows their income for their portion of ownership in that company. A real estate holding such as a multifamily property is a company in the eyes of the IRS and therefore requires a tax filing for the LLC and the distribution of K1s to each of the owners. However, what is unique to the K1 that the owner of real estate receives is that because of the tax depreciation benefits (which we have discussed in previous articles) there is typically a loss shown instead of a profit. The quantity of this loss stated on the K1 can then be used in the individuals personal tax returns in order to save money on other qualifying types of income.
Sometimes passive investors are uncertain of what they must do to receive and utilize their K1. The best answer is to consult a CPA about how you can best utilize the tax write offs you receive from your multifamily investments.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please check out our free ebook "Achieving Financial Freedom Through Multifamily Investing."