K-1 Guide for New Limited Partners

December 2025

For many investors, receiving a K-1 is the most unfamiliar part of investing in real estate syndications. While K-1s introduce some additional complexity compared to traditional investment statements, they are a normal and expected part of owning interests in pass-through entities such as real estate partnerships.

This guide explains what a K-1 is, when to expect it, what information it contains, and how it fits into the broader tax picture for passive real estate investors.

What a K-1 Is – and Why You Receive One

A K-1 is a tax form used to report an investor’s share of income, losses, deductions, and credits from a partnership.

Most real estate syndications are structured as pass-through entities, meaning the entity itself does not pay income tax. Instead, taxable items flow through to investors, who report them on their personal returns.

The information reported on a K-1 ultimately flows onto an investor’s Form 1040, Schedule E, which is where passive real estate income and losses are reported. The K-1 is the mechanism by which that information is communicated.

What a K-1 Is Not

A K-1 is often misunderstood. It is not:

• A statement of cash received

• A summary of investment performance

• A bill or invoice

• A 1099

A K-1 reports taxable activity, which may differ significantly from cash flow in any given year. For example, it is common for an investor to receive cash distributions while also reporting little or no taxable income due to depreciation.

(How depreciation and passive losses affect taxable income is discussed in Depreciation, Cost Segregation & Depreciation Recapture.)

When to Expect a K-1

K-1s are not issued at the same time as traditional investment tax forms. Because partnerships must complete their own tax filings before issuing K-1s, investors typically receive them later in the tax season, often in March or early April.

This timing is normal and does not indicate a problem with the investment or the sponsor. Investors should plan accordingly and communicate with their tax preparer about expected K-1s.

Common Items Reported on a K-1

While the format may look complex, most K-1s include a few recurring elements:

• Ordinary business income or loss, often a loss due to depreciation

• Interest income or expense allocations

• Depreciation and amortization deductions

• Capital account activity, reflecting changes in ownership value

The presence of a loss on a K-1 does not necessarily indicate poor investment performance.

How K-1s Relate to Cash Flow

One of the most confusing aspects for new LPs is the difference between cash distributions and taxable income.

Because depreciation is a non-cash expense, it is common for:

• Cash flow to be positive, while

• Taxable income reported on the K-1 is low or negative

This is a structural feature of real estate investing, not an inconsistency.

How K-1 Losses Are Typically Used

Losses reported on a K-1 are generally classified as passive losses. For most investors:

• Passive losses can offset passive income from real estate, including income from other syndications

• Passive losses cannot offset active or wage income, or income from stocks and other non-passive investments

Unused passive losses typically carry forward and may be applied in future years or recognized when the investment is sold. How these losses apply depends on an investor’s individual tax situation.

Multi-State Considerations

Some syndications operate in states different from where an investor resides.

In these cases:

• The K-1 may reflect income or losses sourced to multiple states

• Additional state tax filings may be required

The need to file in multiple states depends on the amount of income allocated and state-specific rules.

A qualified tax professional can help determine whether additional filings are required.

What Happens to K-1s at Exit

When a property is sold, the final K-1 typically reflects:

• Gain or loss from the sale

• Depreciation recapture

• Final capital account adjustments

Taxable outcomes at exit can differ materially from annual operating years, which is why long-term tax planning matters.

How K-1s Fit Into the Bigger Picture

K-1s are best understood as inputs, not verdicts.

They are one part of:

• A broader investment strategy

• Portfolio-level tax planning

• Long-term after-tax outcome evaluation

They should be interpreted in context rather than judged year by year in isolation.

(For portfolio-level context, see How to Compare Multiple Deals Side by Side.)

Final Perspective

Receiving a K-1 is a normal part of investing in real estate syndications. While the form may look unfamiliar at first, it reflects the tax mechanics that allow real estate to produce tax-deferred cash flow over time. With proper expectations and professional guidance, K-1s become a manageable and routine part of passive investing.

Note: This material is for educational purposes only and is not intended as tax, legal, or investment advice. Tax outcomes can vary significantly based on individual circumstances. Investors should consult with a qualified CPA or tax professional regarding their specific situation.

Continue Learning

This article is part of a broader learning series on passive real estate investing.

→ Start from the beginning here: Passive Real Estate Investing Learning Guide

→ Next recommended read: Should You Use a Retirement Account to Invest in Real Estate Syndications?