Updated for the One Big Beautiful Bill Act
Every year, passive investors receive a K-1 that raises the same question: why does this show a large loss when I know the investment is performing?
The answer is depreciation. Understanding it — and what you can actually do with it — changes everything about how you invest.
From the fund managers behind 15+ years, $150M+ deployed, and 1,500+ loans funded in private commercial real estate.
What's different about this guide
Most K-1 guides explain the form. This one explains what to do with it.
The Problem
A K-1 is not a record of what you were paid. It is your share of the partnership's tax activity — which can look very different from the cash distributions you received.
That disconnect is intentional. It is one of the most powerful features of real estate as an asset class. But only if you understand how it works.
Three things determine what you can actually do with the losses on your K-1:
This guide explains all three — without the jargon.
Timely Update for 2025 & 2026 Investors
If you received a K-1 from a 2025 or 2026 investment, the rules just changed. Bonus depreciation has been restored to 100% and made permanent under the One Big Beautiful Bill Act. How that affects your tax return depends on details most investors don't know to look for — and that your CPA will need to discuss with you. This guide gives you the foundation for that conversation.
What's Inside
Seven sections. Each one answers a question your current CPA conversations might be missing.
If you invest in a real estate syndication, fund, or partnership, you receive a Schedule K-1 (Form 1065) instead of a 1099. This section covers which boxes matter, where they go on your 1040, and why the cash distributions you received are generally not a taxable event on their own — even when your K-1 shows income.
Your K-1 can show a $50,000 paper loss in a year the property collected rent, covered all expenses, and distributed cash to you. That loss is a tax result, not an economic one. This section explains how depreciation works, how cost segregation accelerates it, and what bonus depreciation at 100% means for investors in new acquisitions.
Having a K-1 loss and being able to use that loss are two very different things. Under Section 469, passive losses can only offset passive income for most investors. This section explains the three paths to actually using your K-1 losses — and what happens to the ones you can't use yet.
REP status is one of the most powerful tax strategies available to real estate investors — and one of the most misunderstood. If you qualify, losses can offset W-2 income, business income, or any other income. This section covers both qualifying tests, material participation requirements, the grouping election, and why documentation is the most important practical step.
Equity and debt investments produce very different K-1s. This section explains why debt fund income (Box 5) is taxed at ordinary rates with no depreciation benefit — and why it is still classified as passive income for LP investors, which means it can absorb the suspended passive losses sitting unused on your return.
The year a property sells is the most complex K-1 you will ever receive from that investment. Three things happen simultaneously: suspended losses are released, Section 1231 gain is recognized at long-term capital gains rates, and depreciation recapture is triggered. This section also explains how 1031 exchanges affect the timing of each — and why the distinction between deferral and elimination matters.
A ready-to-use checklist organized by topic — K-1 basics, depreciation, REP status, debt fund income, and the sale event — so you walk into your next tax conversation prepared to ask the right questions.
Built for Investors Who Want to Understand What They Own
The more clearly you understand how your investments work from a tax perspective — not just from a returns perspective — the better decisions you can make, and the better conversations you can have with your own CPA.
We do not prepare your taxes. We do not provide advice on how your K-1 should be reported. What we can do is give you the foundation — so when you sit down with your tax advisor, you are asking the right questions.
"Understanding your K-1 isn't about doing your own taxes. It's about knowing what your investment is doing for you — and not being surprised by what you receive."
— Mike Zlotnik, CEO, Tempo InvestmentsCommon Questions
Plain answers to the questions accredited investors ask most.
A Schedule K-1 (Form 1065) is the tax form real estate partnerships, funds, and syndications use to report each investor's share of the entity's income, losses, deductions, and credits for the year. Unlike a W-2 or 1099, a K-1 does not represent money paid to you — it represents your share of the partnership's tax activity, which may look very different from the cash distributions you received.
The most common reason is depreciation — a non-cash tax deduction that reduces taxable income on paper without any money leaving the investment. When a partnership conducts a cost segregation study and applies bonus depreciation, it can recognize years of depreciation deductions in a single year, generating a large paper loss even when the property is cash-flowing positively. The loss is a tax result, not an economic one. The property is not losing money. Depreciation is doing its job.
For most investors, no — not directly. Under Section 469, passive losses can only offset passive income. They cannot offset W-2 wages or other non-passive income unless you qualify as a Real Estate Professional (REP) under Section 469(c)(7) and materially participate in your rental activities. If you don't qualify, the losses are suspended and carried forward on Form 8582 until you have passive income to absorb them or you sell the investment.
Real Estate Professional (REP) status is an IRS designation that allows qualifying individuals to treat rental real estate losses as non-passive — deductible against W-2 wages, business income, or any other type of income. To qualify, you must: (1) spend more than 750 hours per year in real property trades or businesses, and (2) more than 50% of your total personal service hours must be in real estate. Both tests must be met independently based on your own hours. On a joint return, only one spouse needs to qualify.
The One Big Beautiful Bill Act (2025) restored bonus depreciation to 100% and made it permanent, reversing the phase-down schedule under prior law. For real estate investors, this means eligible property components — identified through a cost segregation study — can be fully deducted in Year 1 of a new acquisition. Investors in 2025 and 2026 acquisitions may see significantly larger paper losses on their K-1s as a result. Your CPA can confirm how this applies to your specific investment and tax situation.
Debt fund income flows through Box 5 of your K-1 as interest income and is taxed at ordinary income rates — the same rate as your W-2 wages. It does not benefit from depreciation pass-through. Equity fund income typically flows through Box 2 as rental income, with depreciation reducing taxable income substantially. However, both types of income are still classified as passive income for LP investors — which means debt fund income can be offset by suspended passive losses from equity investments if structured correctly.
In the year of complete disposition — when the partnership sells the underlying property and you fully exit your interest — all accumulated suspended passive losses are released and become fully deductible in that year, even if you have no other passive income. This is the primary moment those losses pay off. The year of sale K-1 is typically the most complex you will receive, combining suspended loss releases, Section 1231 capital gain recognition, and depreciation recapture.
Partnership returns (Form 1065) are due March 15, with a six-month extension available to September 15. Many real estate funds file on extension, meaning K-1s may not arrive until late summer. If you are waiting on a K-1, file a personal extension (Form 4868, due April 15) to avoid late-filing penalties. This is free, takes minutes, and does not increase your likelihood of audit.
It depends on the type of investment. Equity real estate syndications that use leverage may trigger Unrelated Debt-Financed Income (UDFI) tax inside your IRA, creating a tax liability inside an account designed to be tax-advantaged. Additionally, the depreciation benefits of equity syndications do not flow through to investors inside a retirement account. Debt fund investments that do not use leverage are generally a better fit for IRA or 401(k) accounts. Always ask your fund manager whether the fund uses leverage before assuming UBIT applies.
