Adapted from the December 2023 PREP Newsletter: "So What Does That Mean in Plain English?"
Tax season is right around the corner, and that means one thing–it’s time for the most popular investor question of the season: “Where is my K-1?”
Let's take a deep dive into understanding the function of this highly pursued document, and why it takes so darn long to receive.
Let’s Start With the Basics
The K-1 is a federal tax document which an investor receives for each real estate investment in which they are invested. It is used to report income distributions, and show gains, losses, credits and deductions from the investment. One benefit of depreciation is that it allows the investor to minimize their tax bill from the profits that are gained in a given investment. This is reflected in the K-1.
Such a simple document, so why does it take sooo long to receive?
There are numerous layers of analysis that take place by various departments to ensure that the investor’s return is maximized. Firstly, there's cost segregation; instead of simply depreciating the property as a whole (as addressed in last quarter’s newsletter), engineers spend countless long hours analyzing the property into its sub-components (electrical, HVAC, plumbing) and depreciate those items as well.
Second, many different departments need to collaborate in order to produce the information presented in the K-1. Property Management firms up the year’s income and expenses. Property accountants produce the annual financials and ensure their accuracy. Cost Segregation engineers run and verify their own analysis on the hardware. All of this information (and more) is sent to the General Partner’s accountants to aggregate and break down into a personal K-1 for each investor. This entire process takes place for every property!
What can YOU do to help during this process?
This tax season, take a deep breath, enjoy a nice cup of hot chocolate, and let the K-1 process “do its thing.” We’ll have your K1 delivered to you in the proper time frame for you to end up with the best tax benefits possible.
Written By:
Donny S. Steinberg
Director of Strategy & Innovation
