Depending on how you are involved with a property, there are different tax forms to consider when filing your income taxes. These forms also arrive at different times of the year. In this article, we discuss three common real estate tax forms.
A K-1 is a form that partners in a real estate partnership file annually to show their portion of income in the partnership. The partnership sends out Schedule K-1 for Form 1065 but doesn’t pay taxes on income because it is a pass-through entity. Instead, partners pay any taxes on their share of income.
Investors in a partnership are not employees and do not receive a W-2. They receive a K-1, which reports the partners’ share of income/loss, credits, deductions, and distributions. A K-1 is sent out annually to each partner.
Values from the K-1 are used to fill in the partner/investor’s tax return. K-1s must be filed by March 15. This allows investors enough time to complete their income tax returns by April 15.
A 1099-S is used to report gains on the sale of a property. Investors are supposed to report any gains at the end of the year, but if they don’t, the 1099-S catches these gains. Any gain over $600 must be reported.
A closing agent, property manager, or sponsor will provide a 1099-S for you. Or, if you are managing the property completely on your own, you’ll be responsible for the 1099-S.
The 1099-S is due on the following dates, depending on how it is filed:
- Recipient copy — February 15, 2020
- IRS eFile — March 31, 2020
- IRS Paper Filing — February 28, 2020
When a trust is liquidated, a grantor letter is sent to each grantor of the trust. The letter is an itemization of fees, expenses, insurance, and depreciation from the trust. It also displays income or losses. The grantor letter is an attachment to IRS Form 1041.
What Actually Happens In The Mail
Unfortunately, getting the above forms on time is not what usually happens. Sending out these forms is generally not a priority for smaller or local property managers. Also, complications with property managers at the sponsor level, third-party reporting services, tax preparers who are overwhelmed with returns, can create delays, which can also create delays in filing your income tax return. Because of these complications, DST Sponsors typically begin working on year-end tax information as soon as the calendar year ends and make it a priority to get them out to investors before tax filing dates.
If your K-1 or 1099-S arrives late, request an extension or amend the tax return. If you don’t receive one of the forms, contact the partnership or responsible party.
Sponsors should have a tax plan in place before closing the deal. Scrambling to figure out what needs to be done afterward adds more stress, delays, the potential for mistakes, and is generally not a good game plan.