What is a K-1?
When investing in private real estate transactions, such as the offerings on EquityMultiple, you are technically not investing directly in the property, but rather purchasing membership interest in a “special purpose vehicle” (SPV) established specifically for the investment. For EquityMultiple investments, this is almost always a LLC (limited liability company).
As such, you will receive a Schedule K-1 – a standard IRS form – for each investment that was active during the prior calendar year. This includes even equity investments that are non-income-producing, which may report 0 income for the prior tax year. Simply put, a K-1 reports what taxable income (if any) you have for a given investment for a given calendar year. It is the equivalent of a W-2 that you would receive from an employer as a full-time employee, or a 1099 that you would receive for contract work or other miscellaneous income. Because the majority of EquityMultiple investments are made via an SPV, you will most likely receive one K-1 for each of your EquityMultiple investments that are mid-term.
The Schedule K-1 reports on each partner’s share of the LLC’s earnings, losses, deductions, and credits. It serves a similar purpose to the various Forms 1099, which report dividends or interest from securities, or income from the sale of securities. While a partnership itself is generally not subject to income tax, individual partners, including limited partners, are liable to be taxed on their share of the partnership income, whether or not it’s distributed. A K-1 is commonly issued to taxpayers who have invested in limited partnerships (LPs)
Net Rental Real Estate Income (loss)
This box on the Schedule K-1 shows your pro rata taxable income for your partnership interest in the SPV, generally calculated as the pro rata share of NOI minus interest and depreciation. What share of profits you are entitled to in any given year will be a function of investment performance as well as provisions of the operating agreement.
Does income reported on a K-1 impact my tax liability for state income tax?
Potentially. Generally you will owe taxes in the state where you invested, regardless of your state of residency. If you invest in a state like Washington or Texas that does not assess income tax, you will not owe additional tax on income produced by that investment.
Aside from the seven states that do not assess income tax, states employ a variety of income tax structures with varying minimum thresholds. Whether or not you owe state income tax in a given state – and how much – may also depend on other passive investments made in that state. Separate state K-1s may be included in your K-1 package depending on the location of activities.
Please consult your tax advisor to determine what your state filing requirements are.
Frequently Asked Questions
We receive many questions regarding tax documentation from our investors, here are some of the most frequent and pressing.
Can passive losses on a real estate K-1 offset passive gains listed on a K-1 for another investment?
Yes, as long as both are passive. In order to ensure that this done properly, please consult with your tax advisor.
Will I receive a K-1 for every investment?
Each investment that makes use of an LLC as special purpose vehicle for your investment will issue a K-1.
For the minority of EquityMultiple investments that don’t involve an LLC structure (such as mezzanine debt investments that instead entail an issuance of dependent notes), you will instead receive a 1099-INT.
What goes into processing and delivering a K-1? And why might delivery of a K-1 be delayed?
- We will work diligently to deliver your K-1s as soon as possible.
- We are dependent on third parties to provide timely, accurate information, and therefore cannot make any timing guarantees.
- We will keep you updated on the expected delivery date of all K-1s.
Our goal is to deliver all K-1s by March 15th, allowing sufficient time for our investors and their tax advisors to incorporate into filing prior to the April 15th filing deadline. However, given the number of parties involved, there will almost certainly be some delays in K-1 delivery. This is commonplace in the real estate investing industry. While we recognize this is not ideal, it is no cause for alarm.
The filing of a K-1 for a private real estate investment begins with accounting related to day-to-day operations at the property. In the case of an EquityMultiple investment, the Sponsor may be working with a third-party property management or operations firm. The Sponsor may then need to reconcile financials received from one or more third-party firms with their own accounting. Once this process is complete, EquityMultiple’s CPAs will begin quality assurance work on the documentation received from the Sponsor, ensuring that documents align with accounting best practices and capital accounts balances for EquityMultiple’s SPVs.
We are in frequent contact with sponsors, and seek to expedite their accounting processes in any way we can. However, due to the multiple steps and interdependencies in this process, we cannot guarantee that all K-1s will be delivered on time. We strive to provide frequent communication regarding the delivery timeline of any particular K-1.
How does EquityMultiple help me track the progress of tax document preparation and delivery?
In advance of Tax Day 2020, EquityMultiple’s product team built a Tax Tracker tool to help investors understand the status of their tax documents. If you have made investments through the EquityMultiple platform, and will be receiving tax documents for any given tax year, this tool will be visible in the main navigation of the platform.
For a quick view of the tool in action, please review our brief demo video.
If my K-1 is delayed, will I have to file an extension with the IRS?
Due to the factors discussed above, some K-1s may not be available by April 15th. We will provide you frequent updates and notify you as soon as possible if a K-1 delay is likely. Please consult your tax advisor as to whether an extension should be considered.
Filing an extension with the IRS is common for passive real estate investors. Please engage with your tax advisor to determine whether filing an extension is necessary and, if so, what this process entails.
Who is EquityMultiple’s third-party accountant? How was this determined?
MBAF CPAs, LLC will work with EquityMultiple as our third-party accounting firm. Founded in 1969, MBAF is ranked nationally as a Top 40 accounting and advisory firm and has been named one of the Best of the Best firms in the country by INSIDE Public Accounting for many years running because of their demonstrated long-term consistency and exceptional performance. The firm employs more than 600 highly qualified principals and employees serving domestic and international clients across a broad range of industries and practices from their offices across the country.
We selected MBAF after meeting with dozens of accounting firms. MBAF stood out from the rest of the competition due to their superior customer service and responsiveness which aligns with our core values. The firm’s location in New York City was also an important factor in our selection. It is critical to know exactly who are working with and have the ability to discuss the process in person. Our teams are in constant communication and meet frequently as we coordinate the process of tax document preparation and delivery.
I have invested in an EquityMultiple Investment with a tax exempt entity. Will I receive a 1099?
Investors using an Individual Retirement Arrangement (IRA), 401K, or Corporation account are exempt recipients. This means you are not required to file Form 1099-INT for interest payments made to your account by EquityMultiple. Per IRS instructions, no form 1099-INT will be filed for payments made to exempt recipients. These entities will receive K-1s for investments that require K-1s.