The typical private equity real estate transaction is structured as a Limited Liability Corporation or “LLC” (as opposed to an S-Corporation), which is thought of as a “pass through entity” for tax purposes. Although the entity is technically a corporation, one of the benefits of the LLC is that it is taxed as a partnership, meaning income and expenses “pass through” it and go directly to the individual shareholders/investors who are responsible for claiming their share of income or loss on their own individual income tax return. As a result, investors will receive a Schedule K-1 form.
What is a Schedule K-1 Form?
As part of filing their tax returns, multiple-member LLCs are required to file Internal Revenue Service (IRS) tax form Schedule K-1 each tax year. The Schedule K-1 Form is used to report each member’s share of the partnership’s income, loss, and deductions. Specifically, the K-1 Form is designed to capture things like real estate income, bond interest, royalties and dividends, capital gains, foreign transactions, and any other payments that a member might receive as part of their involvement with the LLC.
Again, the distribution of the Schedule K-1 passes the income tax liability through the corporation to the individual. The income, losses, deductions, and other items reported on the K-1 are included in each individual shareholder’s tax filing.
How many K-1s will I receive?
Investors can expect to receive a separate federal Schedule K-1 for each investment. Additionally, investors may receive a state K-1 for the state that the property is located in.
Will I still receive a K-1 even if I haven’t received a distribution yet?
Yes. You will receive a Schedule K-1 from sponsors showing your share of any income or loss earned by real estate partnership if you have an outstanding investment during the calendar year.
The deadline for sponsors to file partnership returns with federal and state tax agencies is April 15th of the following year, although extensions can be issued until September 15th. K-1s are distributed to investors simultaneously with the filing of the full partnership returns. FNRP intends to file all partnership returns and release K1’s no later than March 31st, 2023.
If you are a current FNRP investor, please log in to your investor portal to see when you can expect your K-1. Interested in learning more? Contact us at (855) 622-3677 or ir@fnrpusa.com for more information.
