Understanding Schedule K-1 as a CRE Investor

by | Jun 24, 2025 | CRE Trends, blog

It takes a lot of work to understand the tax side of CRE — especially if you’re a new investor who might not know what to expect come filing season.

One form you’ll likely come across is Schedule K-1 — a dense and confusing document filled with unfamiliar codes and figures.

This guide breaks down Schedule K-1 in practical terms so that you can quickly learn what it is, what information it includes, and how it affects your taxes and investment returns.

What is Schedule K-1?

Schedule K-1 (Form 1065) reports your share of income, deductions, credits, and other tax items from a business partnership. It’s issued to investors in real estate deals structured as pass-through entities, such as:

  • Real estate syndications that pool funds from multiple investors through limited partnerships or LLCs
  • Private real estate funds are set up as partnerships
  • Individual CRE properties held in LLCs that elect partnership tax treatment

A K-1 essentially reflects your share of a business’s financial performance — including rental income, interest, dividends, royalties, and capital gains or losses. This form is different from a W-2 that reports wages, and a 1099-INT, which shows interest income.

Why do CRE investors receive Schedule K-1s?

CRE receives Schedule K-1s because most deals are structured as pass-through entities (usually LLCs or partnerships) that don’t pay taxes at the entity level.

Instead, all income, deductions, and credits flow directly to the individual investors. The K-1 is the IRS’s way of documenting your share of that financial activity.

This form matters because it ties you directly to the investment’s tax outcome.

You’ll owe tax on your portion of the partnership’s profits even if you didn’t receive any cash that year. If the deal reinvested earnings or paid down debt, your K-1 still reports your share of that income.

Breaking down key sections of Schedule K-1

Schedule K-1 (Form 1065) includes three main parts.

Part I – Information about the partnership

This section identifies the partnership or LLC that issued the form.

  • Name, address, and EIN: Double-check that these details match your records.
  • IRS center: This shows which IRS office received the partnership’s tax filing.
  • Partnership type and business code: You’ll see whether the entity is domestic or foreign and how it’s classified based on its main activity.

Part II – Information about the partner

This section focuses on you (the CRE investor) and your stake in the entity.

  • Partner’s name, address, and TIN: This confirms your personal or entity information. Make sure your Social Security Number (or EIN) is accurate.
  • Type of partner: Most passive investors in CRE are listed as limited partners or LLC members, not general partners.
  • Share of profit, loss, and capital: These percentages reflect your ownership interest at the start and end of the year and determine how much of the partnership’s activity gets allocated to you in Part III.
  • Share of liabilities: This shows your share of the partnership’s recourse and nonrecourse debt. Many passive CRE investors see qualified nonrecourse debt listed here — this is important for understanding how your tax basis and ability to deduct losses are affected.

Part III – Share of current year income, deductions, credits, and other items

This is the section you’ll likely focus on the most because it details your share of the partnership’s income and other tax-related items, many of which you’ll use to complete your Form 1040 and other schedules.

  • Line 1 (Ordinary business income/loss): Shows profits or losses from general business operations. Not usually filled out for pure rental real estate, which is handled on Line 2.
  • Line 2 (Net rental real estate income/loss): One of the most important lines. It shows your share of profit or loss from rental property. For example, if you hold 1% of a partnership that nets $200,000 in rental income after expenses, this line would report $2,000 for you.
  • Line 3 (Other rental income/loss): Refers to income from rental activities that don’t qualify as real estate, which is uncommon in typical CRE deals.
  • Lines 4–13 (Other income and deductions)
  • Line 5a (Interest income) shows your portion of interest earned by the partnership
  • Lines 8 & 9 (Capital gains/losses) includes any profits or losses from selling assets like property
  • Line 10 (Section 1231 gain/loss) captures gains or losses from selling depreciable real estate used in business
  • Line 13 (Other deductions) includes additional deductible items typically explained in an attached statement with letter codes
  • Line 14 (Self-employment earnings/loss): Usually blank for limited partners, since their role is passive.
  • Line 15 (Credits): Reports your share of any tax credits earned by the partnership, such as for affordable housing or historic rehabilitation.
  • Line 17 (AMT items): Lists adjustments needed for Alternative Minimum Tax calculations.
  • Line 19 (Distributions received): This shows how much cash or marketable securities the partnership paid you during the year. These are not usually taxed unless they exceed your tax basis.

Capital account section (Box L)

Box L shows the full breakdown of your investment in the partnership over the tax year—it lists your starting balance, how much money you added (contributions), your share of the partnership’s income or loss, any cash or assets you received (distributions), and your ending balance.

Partnerships now report this on a tax basis as required by the IRS starting in 2020.

That means the numbers in this box reflect your tax basis—the official amount the IRS uses to decide whether you can deduct losses or whether a distribution counts as taxable income.

If your basis falls too low, even a routine cash payout could trigger a tax bill.

If you are a passive CRE investor, focus on Line 2 (rental income or loss), Line 19 (distributions), and Box L. They together show your investment performance, tax liability, and changes to your ownership stake.

Tax implications for CRE investors

Passive income treatment

Most CRE investors fall under the IRS definition of passive participants. That means income or losses reported on Line 2 of your K-1 — net rental real estate income or loss — count as passive.

You don’t actively manage the day-to-day operations, so the IRS separates this income from your job wages or stock dividends.

Passive losses can only reduce passive income. You can’t use them to lower your W-2 wages or interest income from your portfolio unless you qualify for specific exceptions.

One exception applies if your adjusted gross income is below certain levels, in which case you may deduct up to $25,000 in rental real estate losses. Another applies if you qualify as a real estate professional under strict IRS guidelines.

Depreciation and deductions

Even if your property rises in market value, the IRS lets you reduce your taxable income by deducting a portion of the building’s cost each year (not the land).

That deduction — along with others like interest, taxes, and operating costs — can result in a sizable paper loss.

Your K-1 will reflect your share of these deductions. This is one reason real estate deals often show a tax loss even when they generate strong positive cash flow.

For example, your investment might give you a $2,000 cash distribution while your K-1 shows a $3,000 tax loss due to depreciation and other expenses.

Distributions vs. taxable income: understanding “phantom income”

It’s common for new investors to confuse cash received with taxable income, but these aren’t the same.

Distributions (Line 19) represent the cash paid out to you.

That cash isn’t automatically taxable. It’s usually treated as a return of capital and only becomes taxable if it pushes your investment basis below zero.

Taxable income, on the other hand, is based on your share of the partnership’s income or loss — regardless of whether any cash was distributed.

This means you might owe taxes even if you didn’t receive any money from the deal. This situation is known as phantom income and it often happens when a partnership retains earnings for reinvestment or debt repayment.

Carryforward of passive losses

If your K-1 reports a passive loss and you don’t have enough passive income to use it this year, you’re not out of luck. The IRS lets you carry that unused loss forward.

You can apply it against future passive income from the same deal or other passive investments. And if you eventually sell your entire stake in the partnership, you can deduct any remaining unused losses against any type of income — passive, active, or investment — in the year of sale.

Capital gains treatment

When a CRE property is sold, your K-1 will include your share of the gain or loss. These gains typically fall under the capital gains rules.

If the property was held for more than a year, you’ll report a long-term capital gain, usually taxed at a lower rate (0%, 15%, or 20% depending on your income).

If the asset was held for a year or less, the gain is short-term and taxed at your regular income rate.

If the property was depreciated during ownership (as most are), part of the gain gets taxed at up to 25% instead of the lower capital gains rate. This recapture applies to the amount of depreciation you previously claimed and reduces the tax advantage of that portion of the gain.

Your K-1 will often list this on Line 10 (Section 1231 gain/loss), and may include an attached statement explaining the recapture and the breakdown between ordinary and capital gains.

Sources       

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Author

  • Keith Thomas is the founder and CEO of Private Capital Investors, bringing over 30 years of real estate and finance expertise to the company. Mr. Thomas began his real estate career in 1993 with his first investment in an office building in downtown Washington, D.C. He quickly advanced to become an asset manager at TransAmerica Mortgage Company, where he managed the acquisition of millions of dollars in mortgage notes daily.

    Building on his success in private equity, Mr. Thomas returned to Georgetown, Washington, D.C., to establish his own residential mortgage company. As one of the top originators in the nation, he earned a reputation for excellence and client-focused service. Later, he transitioned into commercial real estate, founding his own commercial mortgage firm. In this role, he oversaw a team of 50 professionals, specializing in multifamily, office, healthcare, and retail property financing.

    Throughout his distinguished career, Mr. Thomas has been personally involved in financing transactions totaling over $11 billion. His deep industry knowledge, hands-on leadership, and commitment to client success have made him a recognized authority in commercial real estate lending.

    Mr. Thomas holds a Bachelor of Science degree with honors from Georgetown University and an MBA in Finance.

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