Understanding Your K-1 as a Passive Investor

If you’re a passive investor in multifamily real estate, you’ll receive a Schedule K-1 each year from the general partner’s accountant. At first glance, this form can look intimidating — but it’s simply a document that reports your share of the partnership’s earnings, losses, deductions, and credits.

The K-1 is also where you’ll see the depreciation benefits of real estate passed through to you, which can often offset taxable income. Let’s break down the most important sections for passive investors.

Box 2: Net Rental Real Estate Income (Loss)

This box reflects what’s left after subtracting expenses from revenues — including depreciation.

👉 In many cases, you’ll see a paper loss due to accelerated depreciation.

For example: a K-1 might show a $50,507 depreciation deduction, creating negative taxable income overall.

💡 Key takeaway: A paper loss doesn’t mean the property is underperforming. It often signals that you’re benefiting from real estate’s tax advantages.

Box 19: Distributions

This box shows the actual cash you received as a limited partner.

For example: you might see a $1,400 distribution, representing your preferred return and profits.

💡 Key takeaway: Even if your K-1 shows a tax loss, you may still be receiving regular cash distributions. Losses on paper = tax strategy, not poor property performance.

Section L: Partner’s Capital Account Analysis

This section reports your tax basis, not your true investment balance.

For example: an ending capital account might show $48,093, but that doesn’t reflect your preferred return capital balance. Depreciation reduces your tax basis, but it doesn’t reduce the return you’re owed from the operator’s perspective.

💡 Key takeaway: Operators structure deals so that limited partners continue to receive preferred returns on their initial investment, regardless of depreciation. Any adjustments are reconciled at the sale of the property.

Understanding K-1 as a Passive Investor — What It Means for You

The Schedule K-1 can look complicated, but once you understand its structure, it becomes a powerful reminder of real estate’s unique benefits:

• Cash flow through distributions

• Tax savings through depreciation

• Long-term equity growth

Always review your K-1 carefully and consult with a tax professional to make sure you’re maximizing its advantages. By understanding K-1 as a passive investor, you can better prepare for tax season and avoid surprises when filing.

📘 For more details, see the IRS guide: Partner’s Instructions for Schedule K-1 (Form 1065)