If you own real estate, then you probably know that your property taxes are deductible as a real estate expense. But did you know that when it comes to Schedule K-1, the form used to report your income from a pass-through entity such as an S corporation or partnership, there are some things you might not know about?
The purpose of Schedule K-1 is to help determine whether you have a gain or loss on the sale of an investment property or rental property. When you bought the property, you invested some money in it. When you sell it, that money has been “capitalized” (turned into income) via depreciation deductions (which reduce taxable income). The Schedule K-1 helps to determine whether those capitalized costs are more or less than what they were when you purchased the property, which will determine whether there’s a gain or loss on the sale.
What Is Schedule K-1?
Schedule K-1 is a tax form that is issued by the Internal Revenue Service to individuals who have invested in real estate partnerships, limited liability companies or other entities that earn rental income. Investors are required to report the income earned from these investments on their individual tax returns and use Schedule K-1 as an attachment to do so.
Schedule K-1 is also used when a partner in a partnership or S corporation sells property to the entity or receives compensation for services rendered to the entity. The IRS requires investors who receive this type of income to report it on Schedule K-1, even if they have already reported it elsewhere on their tax return.
Schedule K-1 contains three columns: one for each of your investment properties. You’ll need to fill out a separate Schedule K-1 for each one of your properties, even if they’re all owned by the same entity or individual partner. If you own multiple properties through different entities, you will need separate Schedules K-1 for each property.
Who Files Schedule K-1?
Schedule K-1 is a tax form that is used by real estate investors and individuals who earn rental income from other sources. This form reports how much money was received from each property over the course of the year, as well as certain expenses related to that property.
Schedule K-1 is used to report the income and expenses of each property that you own. If you rent out a single home or apartment building, then this won’t apply to you since there’s just one owner on the deed. However, if you own multiple properties or have several investors in an LLC or partnership involved in real estate investing, then it makes sense to use Schedule K-1 instead of including everything on your personal tax return.
What Is K-1 Distribution?
When you sell a rental property, you’ll typically receive a 1099-S tax form from your real estate agent. The 1099-S is used to report the proceeds from selling a rental property. However, there are some instances where you might not be required to file this form.
If you’re a single-member limited liability company (LLC), then your LLC will be taxed as if it were a sole proprietorship. That means it’s subject to self-employment tax on net income instead of double taxation like corporations are.
In that case, you’ll need to file Schedule E with Form 1040 and report any income or loss from your rental properties on Line 21 of Schedule A. If your total amount of passive activity income exceeds $100,000 for the year, then you’ll also have to file Form 8582 and Form 8825 as well.
However, if you own multiple rental properties through an LLC or corporation and they’re all operated by someone else or through an organization such as a partnership or limited liability partnership (LLP), then you won’t need to file Form 8582 or Form 8825 because the IRS treats each entity separately for tax purposes rather than combining them together into one entity.
How To Read The K-1?
When you are in the process of buying real estate, there are some things that you need to know about. The K-1 is one of these things that you need to know about.
The K-1 is a form that will be sent to you by the seller’s accountant. This form is used for reporting income from real estate sales and rentals.
The K-1 can be difficult to understand, but it is important that you do understand it because it relates directly to your tax liability when buying real estate.
Here are some tips on how to read the K-1:
Know what kind of property you are buying – You need to know what kind of property you are buying so that you can determine which type of K-1 form will be sent out by the seller’s accountant. If there are any questions regarding this, talk with your real estate agent or attorney before signing anything.
Know how long you have owned the property – If you have owned the property for less than 12 months then it should not matter how long you have owned it for because capital gains taxes will not apply until after 12 months of ownership has passed. However, if this does not apply and capital gains taxes do apply then make sure you talk with your real estate agent or attorney.
When Is The K-1 Due?
The K-1 tax form is due on or before April 15th for the previous year. For example, if you bought a rental property in June of 2021, then your K-1 tax form must be filed by April 15th 2022.
In most cases, the seller will provide you with the correct date to file your K-1 form. If they do not provide it to you and you have questions about when to file your K-1 tax return, then please contact us and we will be happy to help you out.
Important K-1 And Tax Filing Information For Private Real Estate Investors
Private real estate investors are responsible for paying their own taxes on the investment income they earn through real estate. This can include passive income earned from rental properties, as well as active income from property management companies.
Tax time is fast approaching and many private real estate investors are starting to receive their K-1s from their partnerships. This is the time of year when many people ask me about the K-1 tax forms and how they should file them with their taxes.
The first thing you need to know about the K-1 is that it’s not a tax form. It’s a document that reports your income and expenses for your partnership or LLC, depending on which entity you have chosen to use for investing in real estate. Your accountant will use this information to prepare your Form 1040 tax return, which determines how much tax you owe or how much money you get back from the government at tax time.
The most important thing to remember about the K-1 is that it takes into account all of your income and expenses associated with your investment property(ies). This means that if you sold one of your properties last year but still have several others that produced income, then you will need to report those incomes even if they were not sold!
Final Thought
Whether you are listing or buying, it is important to understand what goes into the “Schedule K-1” form that you receive from your real estate agent. This explains a lot about your tax obligations and can be helpful when reconciling your taxes after the year is over.
Watch the free webinar recording on how to read your Schedule K-1
