How to Stay Ahead
K-1s, Multifamily Investments, & Potential Tax Changes
If you’re investing passively in multifamily real estate, you’re already familiar with “K-1s,” multistate filing requirements, and very likely aware of the possibility of 100% bonus depreciation returning under this new administration.
It can sound complicated, but with a deeper understanding of these concepts, and some advanced strategies surrounding them, you can position yourself to take maximum advantage of real estate’s unique tax benefits.
Below, I will break down how these elements can affect your investments, highlight more sophisticated tactics for protecting and growing your capital some investors use, and explain why keeping an eye on potential policy shifts can make all the difference.
The Big Picture: Why K-1s Still Matter
At the end of each year, you receive a Schedule K-1 (Form 1065) if you’re a limited partner in a multifamily deal. This document is essentially the key to understanding your share of the partnership’s income, deductions, and credits.
It’s not just a form for tax compliance – your K-1 reveals how effectively your sponsorship team is leveraging real estate’s tax advantages on your behalf.
The Upside: One of the biggest perks of real estate investing is depreciation, and cost segregation studies can accelerate those benefits. When you receive your K-1, you’ll see how these deductions offset your share of the property’s rental income or other gains—often resulting in a lower taxable income. Under IRC Section 168(k) (bonus depreciation), some of these deductions could be accelerated even further.
The Bottom Line: While your CPA does the day-to-day heavy lifting, having a high-level grasp of the K-1 is crucial. Check for items like ordinary business income, rental real estate income, and depreciation to gauge how effectively your investment team is managing both income and tax benefits.
Key Details in Your K-1
Ordinary Business Income (Loss)
-
This figure shows the core profit or loss generated from the property’s operations (think rents minus expenses). It’s your first stop for understanding whether the asset is achieving stable cash flow.
Rental Real Estate Income (Loss)
-
Here’s where the property’s specific rental activities are reflected. Most of your real estate-related gains or losses will appear here, especially if you’re classified as a passive investor.
Depreciation and Special Deductions
-
Cost segregation can break down a building’s components (like roofs, parking lots, appliances) into shorter depreciable lives—boosting these deductions in the early years. Pay attention to whether the syndicator performed a cost segregation study; it can unlock significantly higher depreciation, which your K-1 will reflect.
Capital Account Analysis
-
Track how your equity evolves. This section tallies contributions, your share of any gains or losses, and distributions received over the year—a handy snapshot of your “skin in the game.”
Get a Free Multifamily Loan Quote
Access Non-Recourse, 10+ Year Fixed, 30-Year Amortization
Beyond Federal Filings: The State Puzzle
Filing taxes isn’t one-size-fits-all. Federal filing rules are relatively straightforward: the partnership files Form 1065, then issues K-1s to each partner. State requirements, however, can get more complex – especially if the property is located in a different state from where you live.
-
Investing in Your Home State: Typically simpler. You report rental income or loss on your resident state return.
-
Out-of-State Properties: Expect additional steps. You might file a nonresident state tax return where the property sits, and some states also have franchise taxes or special filing fees on partnerships. Generally the sponsor will cover the filing fees, but as an investor you’re still responsible for filing your annual taxes.
What It Means for You: If you have multiple real estate holdings across different states, team up with a CPA versed in multi-state compliance. Overlooking a state filing can result in penalties or missed opportunities to optimize your tax position.
A Word on Bonus Depreciation: Watching for the Next Move
Historically, 100% bonus depreciation allowed investors to write off the full cost of qualified assets in the first year. This phased down to 80% in 2023 and then to 60% in 2024, and is set to keep dropping unless Congress or this new administration reinstates it fully.
Potential Reinstatement
There’s buzz that the Trump administration, or any pro-real-estate administration, could push to bring back the 100% write-off. That’s far from guaranteed, but it’s worth watching if you’re looking at investments that could benefit from significant first-year deductions (think major renovations, new developments, or heavy-value-add deals).
Why It Matters: If 100% bonus depreciation returns, you could see a dramatic uptick in upfront tax savings, potentially reshaping and improving the returns forecasted at acquisition. Staying informed helps you adjust your strategy, possibly timing deals or cost segregation studies to capitalize on any new legislation.
Tactical Considerations for Investors
-
Dive Deeper into Cost Segregation If you’re in a larger investment (like a major multifamily property), ask your sponsor if they’ve performed a cost segregation study. This could ramp up your K-1’s depreciation deductions—particularly beneficial if bonus depreciation rules become more favorable.
-
Evaluate the Capital Stack and Waterfall Structure The structure of the deal—how profits are split, preferred returns, sponsor catch-ups—impacts the timing and nature of distributions. It can also influence how and when certain income and losses show up on your K-1.
-
Risk Management and Compliance Multi-state or multi-property investing requires thorough record-keeping. Seasoned investors know minor oversights (like missing a nonresident state filing) can snowball into costly penalties. Ensure your sponsor’s tax and legal team is top-notch.
-
Plan for the Next Market Cycle Legislative shifts often coincide with broader economic cycles. If you anticipate a change that reinstates 100% bonus depreciation, consider timing acquisitions near that window. Similarly, weigh if a 1031 exchange might align better with your long-term goals.
Final Thoughts
K-1s aren’t just a once-a-year hassle – they’re a window into the performance and tax efficiency of your multifamily investment. Paying attention to advanced strategies like cost segregation, understanding how state filings intersect with your returns, and keeping tabs on bonus depreciation developments all position you to capitalize on real estate’s dynamic tax environment.
Even if 100% bonus depreciation never fully returns, real estate remains a highly advantageous asset class, with or without immediate write-offs. The key is staying proactive, leveraging a knowledgeable advisory team, and being ready to pivot if policy changes create fresh opportunities.
When you understand the deeper mechanics behind K-1s, you’re not just filing taxes, you’re actively sharpening your competitive edge in the multifamily investing space.
Source: Blue Lake Capital
Accessibility