After years of working alongside investors, from first-timers to seasoned pros, we've seen firsthand the difference between those who simply "file" their K-1s and those who use them strategically to reduce their tax burden and build lasting wealth. Here’s what you need to know.
What is a K-1 (and Why It Matters)?
Simply put, a K-1 is a tax form (officially, IRS Schedule K-1 Form 1065) you receive when you invest in a partnership, like a multifamily real estate deal. It reports your share of the partnership's income, losses, deductions, and credits.
The beauty of real estate is that, thanks to depreciation and other expenses, your K-1 often shows a paper loss even when you’re receiving positive cash flow. That's not a loophole; it’s one of the intentional benefits of investing in real estate under the current tax code.
How to Maximize Your K-1 Benefits
1. Work with a CPA Who Understands Passive Real Estate Investing
It sounds simple, but it’s one of the most overlooked steps. Not all CPAs are created equal. We've seen investors work with generalists who miss significant opportunities because they don’t fully grasp how passive losses, bonus depreciation, or cost segregation studies work in real estate. You want someone who knows the playbook inside and out.
2. Take Full Advantage of Passive Losses
Passive losses, especially when accelerated through bonus depreciation, can offset your passive income from other investments. If you’re investing in multiple real estate deals, or other passive income-generating businesses, your K-1 losses may significantly reduce your tax bill. However, if you don’t report them correctly or your CPA doesn’t track them year-over-year, you might miss out.
3. Track Suspended Losses
Just because you can't use passive losses today doesn't mean they're gone. They carry forward indefinitely. You'd be surprised how many investors have "suspended" losses sitting in past-year returns because they were never tracked properly. These losses can unlock major tax savings later when you have sufficient passive income or when you dispose of a property.
4. Consider Grouping Elections (if Applicable)
This is more advanced, but worth mentioning. Some high-net-worth investors may benefit from grouping elections that allow certain real estate activities to be treated as materially participating. This could enable some investors to use passive losses against active income. This is highly case-dependent, so talk to your CPA.
Mistakes to Avoid
Consider Grouping Elections (if Applicable)
- Many investors wait until the last second or after filing extensions to hand over their K-1s. You want to give your CPA as much time as possible to integrate the information properly — especially if you have complex holdings.
- Your losses won’t magically reduce your taxes unless they are entered and tracked properly. We've worked with investors who thought they were benefiting from passive losses, only to find out later they were never applied to prior returns.
- Major life changes: new businesses, investments, marriage, or even planning to sell assets — can change how you should handle your passive losses. Keep your CPA informed.