November 9, 2023
By: Travis Watts, Director of Investor Education
Who likes doing taxes?
Tax forms can often appear as intricate puzzles, especially for individuals engaged in investment ventures like real estate private placements. Among these forms lies the K-1 tax form—a document that investors need to know.
Understanding the K-1 Tax Form
The K-1 tax form, officially recognized as Schedule K-1 (Form 1065), serves as a comprehensive record of income, deductions, credits, and other tax-related data allocated to partners. It plays the role of reporting each investor’s stake in income and losses from the associated entity or entities. Investors then utilize the K-1 when filing their individual tax returns.
Our CPA prepares K-1 tax forms for all our investors at Ashcroft Capital. Understanding a K-1 tax form is essential for investors in real estate private placements and other private investment enterprises.
Sections of the K-1 Tax Form
Part I – Information About the Partnership
A: Within this section, the partnership’s unique employer identification number (EIN) for tax purposes is provided.
B, C: It also entails the legal name and physical address of the partnership, along with details about where the partnership files its tax return.
D: Additionally, a checkbox is included to determine if the partnership is publicly traded.
Part II – Information About the Partner
E,F: Partners’ individual identification particulars are captured here. This section records partner names, addresses, cities, states, and ZIP codes.
G: Partners identify themselves as general partners, limited partners, or LLC member-managers.
H: It also designates domestic or foreign partner status, with foreign partners potentially subject to additional withholdings for U.S.-based businesses.
I: Partners specify their entity type, such as an individual, corporation, or retirement plan.
J: Partner shares in partnership profit, loss, and capital are outlined, including beginning and ending percentages for profit, loss, and capital contributions.
K: The section details partners’ share of liabilities, encompassing nonrecourse financing, qualified nonrecourse financing, recourse financing, and any liabilities from lower-tier partnerships.
L: Partner capital accounts at the start and end of the reporting period are displayed, including contributions, net income or loss, other changes, withdrawals, and distributions.
M: This section requires relevant information if a partner contributed property with a built-in gain or loss, with the option to attach a statement for additional details.
N: It also addresses partners’ share of unrecognized gains or losses related to section 704(c) of the Internal Revenue Code.
Part III – Partner’s Share of Current Year Income, Deductions, Credits, and Other Items
This section is a comprehensive collection of components, including ordinary business income or loss, rental real estate income or loss, interest income, dividends, royalties, capital gains, deductions, credits, distributions, and supplementary data.
Bonus Depreciation Explained
Bonus depreciation offers businesses a means to accelerate tax deductions for qualifying property acquisitions. This incentive allows companies to deduct a substantial percentage of eligible asset costs in the year they are placed in service, rather than spreading deductions over several years. As an Ashcroft Capital investor, you can benefit from bonus depreciation. To learn more, please visit www.investashcroft.com.
Cost Segregation Studies
A cost segregation study involves categorizing and reclassifying components of an investment property into shorter depreciation schedules, such as 5, 7, 10, and 15-year components. The study generates substantial paper losses on tax returns, particularly in the first year of ownership. This approach helps real estate investors mitigate tax impacts on cash flow by accelerating deductions.
At Ashcroft Capital, we conduct cost segregation studies on our properties. To learn more, please visit www.investashcroft.com.
A 1031 Exchange
A 1031 tax-deferred exchange allows investors to defer capital gains into “like-kind” real estate. Ordinarily, when selling property, taxes are due on any profits. As an Ashcroft Capital investor, you can benefit from 1031 exchanges when we sell properties. To learn more, please visit www.investashcroft.com.
Several requirements must be met to execute a 1031 exchange, so consulting with a licensed tax advisor for details is essential.
*None of the content in this article should be regarded as tax advice. Always seek counsel from a qualified tax professional for personalized guidance regarding your specific tax situation.”