A partnership does not pay federal income tax itself. It files Form 1065 and issues each partner a Schedule K-1 reporting that partner share of income, deductions and credits, which the partner reports on their own return. A K-1 is not a 1099 and does not report cash received; it can allocate taxable income in a year with no distribution. Partnerships commonly extend, and tiered structures cannot finalize a K-1 until the entity below reports, so investors frequently extend their own returns.

The money

Schedule K-1: what arrives and when

Ricardo Sanabria, Founder & CEO

Published 24 August 2026 Last updated 24 August 2026

The K-1 is the document that surprises first-time limited partners most, on two counts: when it arrives and what it says.

Key takeaways

A partnership pays no federal income tax. The K-1 allocates your share of each item to your own return, which is why the paperwork is heavier than a 1099.
Box 2 usually carries the rental operating result and box 19 the cash you received. They routinely differ, because depreciation does not consume cash and principal repayment is not deductible.
Item L is a bookkeeping capital account. The instructions state it cannot be used to figure your adjusted basis, and in a leveraged deal the two differ significantly.
Tracking your own adjusted basis is expressly your responsibility, not the sponsor's, and it determines your taxable gain at exit.
A loss passes through four limitations in order: basis, at risk, passive activity, and excess business loss. Blocked amounts are suspended, not lost.
Owning property in a state can create a nonresident filing obligation for you. Ask whether a composite return is filed and whether you are included by default.
Partnership returns are due on the 15th day of the third month, but most real estate partnerships extend, so plan to extend your own return rather than treating it as a failure.

What the form is doing

A partnership does not pay federal income tax. It computes its income, deductions and credits, files a return, and then allocates each partner their share, which the partner reports on their own return. Schedule K-1 of Form 1065 is the document that carries your share from the partnership to you.

That flow-through design is the reason private real estate is held in partnerships and LLCs taxed as partnerships in the first place. Depreciation, interest expense and operating losses reach you directly rather than being trapped inside a corporation, and the income is taxed once rather than twice.

It is also the reason your tax life becomes more complicated the moment you subscribe. You are no longer receiving a single number on a 1099. You are receiving an allocation of many separate items, each of which lands somewhere different on your return, some of which are limited before they get there, and some of which create filing obligations in states you have never lived in.

None of this is a problem. It is work, and knowing the shape of it in advance is the difference between a straightforward filing and a bad March.

The boxes that carry the money

Most of the K-1 will be blank in a multifamily deal. A handful of boxes do the work.

Box 1, ordinary business income or loss, and box 2, net rental real estate income or loss. For a property-owning partnership the operating result is normally in box 2 rather than box 1. The distinction matters because the two are treated differently on your return and because rental real estate carries the passive treatment described below. Seeing an unexpectedly large box 1 on a deal you understood to be a rental is a reasonable thing to ask about.

Box 19, distributions. This is the cash you actually received, and its most important property is that it is not the same as your taxable income. The instructions treat distributions as a separate item covering cash, marketable securities, property and deemed distributions arising from a decrease in your share of liabilities.

Box 20, other information. A catch-all that in practice carries the items with the most consequence, including investment income and expenses, recapture items, business interest expense, and section 199A information for the qualified business income deduction. Codes here frequently point to a statement attached behind the form, and the statement is part of the K-1 rather than an appendix you can ignore.

The single most common surprise for a first-time limited partner is the gap between box 2 and box 19. A deal can distribute cash while reporting a loss, because depreciation is a deduction that does not consume cash. It can also report income while distributing nothing, because principal amortization and capital reserves consume cash without being deductible. Neither is an error, and neither is a warning sign on its own.

Item L, and the mistake almost everyone makes

Part II item L is the partner's capital account analysis: beginning balance, capital contributed, current year increase or decrease, withdrawals and distributions, ending balance. It looks exactly like a statement of what your investment is worth and what your stake in it is. It is neither.

The instructions say so directly, and this is the sentence to remember: "Although the partnership provides an analysis of the partner's capital account in item L of Schedule K-1, that information is based on the partnership's books and records and can't be used to figure the partner's adjusted basis."

Two different measurements are in play. The capital account is an internal bookkeeping figure maintained by the partnership. Your adjusted basis in the partnership interest, sometimes called outside basis, is a tax attribute of yours that the partnership does not compute. They usually differ, and the most common reason is debt: your share of partnership liabilities is included in your outside basis but is not in your capital account. In a leveraged multifamily deal that difference is not a rounding error.

People act on this confusion in two directions. They read a declining capital account as the deal losing value, when it is often just depreciation and distributions doing exactly what they should. Or they read the ending balance as what they would receive on a sale, which it is not, because the exit distribution follows the waterfall in the operating agreement rather than the capital accounts.

Your basis is your job, not the sponsor's

The instructions are unambiguous about where the obligation sits: "It's the partner's responsibility to track and maintain the information necessary to figure their adjusted basis in the partnership."

That sentence catches investors out because everything else about a passive position is done for you. The sponsor operates the asset, keeps the books, files the return and sends you the form. This one thing they do not do, and nobody will chase you for it.

The mechanics are straightforward in outline. Basis starts with what you contributed, increases by your share of income and by increases in your share of partnership liabilities, and decreases by distributions, by your share of losses and by decreases in your share of liabilities. IRS Publication 541 sets out the partnership rules.

It matters at three moments. It limits the losses you can deduct, as described next. Distributions in excess of basis are generally taxable as gain rather than a return of capital. And it determines your gain when the deal exits, which is the year the number is worth the most and the year it is hardest to reconstruct if nobody has been keeping it.

The practical advice is unglamorous and worth following. Keep the K-1s. Keep the subscription documents. Keep them for the whole hold and for years after the exit, and give your CPA the full set at the start of the relationship rather than the current year alone.

The four gates a loss has to pass through

A loss on your K-1 is not a deduction on your return. It is a candidate for one. The instructions set out four limitations that apply in sequence: "the basis limitations, the at-risk limitations, the passive activity limitations, and the excess business loss limitations." Each one is applied to what survived the previous one, and any of them can reduce the deduction to nothing.

Basis. You cannot deduct a loss beyond your adjusted basis in the partnership interest. Anything above it is suspended until basis is restored.

At risk. A separate and stricter test under section 465, computed on Form 6198, which asks how much you genuinely stand to lose. It excludes amounts protected against loss and treats certain nonrecourse borrowing differently from the basis rules, so an amount included in basis is not automatically at risk.

Passive activity. The one that stops most limited partners. Rental activity is generally passive under IRS Publication 925, a passive loss offsets passive income rather than salary or portfolio income, and the computation runs on Form 8582. This is why a large depreciation loss frequently produces no current tax benefit at all, and the detail is in cost segregation and bonus depreciation.

Excess business loss. A further cap applying to non-corporate taxpayers on aggregate business losses for the year, with the disallowed amount carried forward.

Nothing is destroyed at any gate. Amounts blocked are suspended and carried forward, and passive losses are released on a fully taxable disposition of your entire interest in the activity. But suspended is not deducted, and a projection that shows a first-year tax benefit without saying which of these four gates it assumes you clear is showing you an outcome rather than a calculation.

The state filings nobody mentions at subscription

A partnership that owns property in a state generally sources income to that state, and that income is attributed to you. If you do not live there, you may have a nonresident filing obligation in a state you have never set foot in, and a portfolio of several deals across several markets can produce several of them.

Sponsors commonly handle this in one of three ways, and which one applies changes your filing materially. The partnership may withhold nonresident tax on your behalf and report it to you. It may file a composite or group return that includes you, which can remove the need for you to file individually but may forfeit deductions or a lower bracket you would otherwise have had. Or it may do neither and leave the obligation entirely with you.

Rules, thresholds and elections differ by state and change, so the only reliable answer comes from the sponsor for the specific deal and from your own CPA for your specific return. What is reliable is the question. Ask before you subscribe which states will generate a filing obligation, whether a composite return will be filed, whether you will be included by default, and whether you can opt out.

It is also worth knowing that being included in a composite return in one state can interact with the credit you claim for taxes paid to other states on your home state return. That is exactly the sort of thing that is cheap to plan for and expensive to unwind.

Why it arrives when it does

A calendar year partnership return is due, per the instructions to Form 1065, by the "15th day of the third month after the close of the partnership's tax year," which is 15 March. Partnerships may obtain an extension using Form 7004, and in practice most real estate partnerships do.

The reason is structural rather than negligent. A property-owning partnership cannot close its books until it has final figures from property management, from the lender on interest and reserves, from any cost segregation study, and frequently from a fund or joint venture above it that is itself waiting on its own inputs. Each layer waits for the one below.

The consequence for you is that a K-1 arriving in March is the exception rather than the rule, and that you should plan on extending your own return rather than treating the extension as a failure. An extension to file is not an extension to pay, so an estimate still has to be made and paid on time. Ask the sponsor in February for an estimate of your allocation if you need one.

What is reasonable to expect is communication rather than speed. A sponsor who tells you in February that K-1s are expected in July is managing you properly. A sponsor who is silent until August is telling you something about how they run everything else. We wrote about the pattern in why your K-1 is late.

What to do the day it arrives

Open it rather than forwarding it. Five minutes of reading catches most of the problems that are cheap to fix now and expensive to fix in October.

Check that your name, taxpayer identification number and entity type are right, because a K-1 issued to you personally when you subscribed through a trust or a retirement account is a real problem and a common one. Check that the ownership percentage matches your subscription. Check that box 19 matches the distributions you actually received, since a mismatch is usually a bank or address issue rather than a tax one but you are the only person who can see both sides. Read any statements attached behind the form, particularly anything under box 20.

If you subscribed through a self-directed retirement account, look specifically for unrelated business taxable income, because a leveraged deal can create a filing obligation for the account itself. That is set out in self-directed IRAs and the UBIT surprise.

Then send the whole thing to your CPA, including the statements, and tell them which states are involved. If anything looks wrong, ask the sponsor in writing and keep the reply. A corrected K-1 issued in April is an administrative matter. The same correction discovered after you have filed is an amended return.

Before you wire

What to ask about reporting

Which states will this deal create a filing obligation in for me?
Will the partnership file a composite or group return, will I be included by default, and can I opt out?
Will nonresident tax be withheld on my behalf, and how is it reported to me?
When were K-1s issued for your existing deals in each of the last three years?
If K-1s will be late, will you provide an estimate in February so I can pay with my extension?
Will the K-1 be issued to my subscribing entity rather than to me personally?

Sources

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Ricardo Sanabria · Grey Oaks Multifamily

Answering

Follow-up questions people ask after reading this.

Why does my K-1 show a loss when I received cash?

Because depreciation is a deduction that does not consume cash. A property can distribute cash from operations while reporting a taxable loss after depreciation. The reverse also happens, since principal repayment and reserve funding consume cash without being deductible.