Apartment Syndication Taxes for Beginners: K-1s, Depreciation and Passive Losses
Apartment syndication investors usually receive a Schedule K-1 each year that reports their share of the partnership's income, deductions and losses. That share can differ from the cash you received. Depreciation, your basis and the passive activity rules shape what you report, so have a CPA read your K-1.
If you are the sponsor, we built DoorRaise to prepare the partnership return and K-1s for your investors. This guide is general information for the investor receiving one.
This guide sits inside our complete guide to real estate syndication. It stays on one question: what does a first-time syndication investor need to expect at tax time? It is not tax advice, and a CPA should look at your full return.
What is a Schedule K-1?
A Schedule K-1 is the form a partnership gives each partner to report that partner's share of its income, deductions and credits. The IRS Schedule K-1 (Form 1065) instructions say you keep it for your records and generally do not file it with your return. The partnership files its own return on Form 1065.
A partnership does not pay income tax itself. It passes items through to the owners, so you can owe tax on your share even when you received no cash. Our K-1 guide walks through the boxes.
The boxes beginners see most
Net rental real estate income or loss usually appears in Box 2, and ordinary business income or loss in Box 1. Distributions are coded in Box 19. Your CPA will map these to your return, so do not try to transcribe them yourself.
Why can taxable income differ from my distributions?
Distributions are cash, while the K-1 reports taxable items, and the two are calculated differently. The biggest gap is depreciation, a deduction for the wear on a building that does not require any cash outlay in the year you take it. The IRS Publication 527 lists 27.5 years as the recovery period for residential rental property.
A cost segregation study may move part of a building's cost into shorter recovery periods and speed up deductions. Our guide to cost segregation for apartment syndications explains it, and whether it fits your deal is a question for the sponsor's CPA.
Worked example: cash versus K-1 income
This is an illustrative example, not a projection. You invest $100,000 and receive $6,000 in distributions in each of three years. Your share of income before depreciation is $5,500 a year, and your allocated depreciation is $9,000 a year.
| Item | Per year |
|---|---|
| Cash distributions | $6,000 |
| Share of income before depreciation | $5,500 |
| Allocated depreciation | $9,000 |
| Taxable result on your K-1 | -$3,500 (a loss) |
You received $6,000 in cash, and the K-1 shows a $3,500 loss. If your basis stays above zero, the cash is generally not taxed in that year. Basis here starts at $100,000, ignoring your share of partnership debt and fees, which your CPA would include. After year 1 it is $90,500, after year 2 $81,000 and after year 3 $71,500.
What is basis and why does it matter?
Basis is, roughly, your tax investment in the partnership, and it limits how much loss you can deduct. The K-1 instructions say you can generally deduct a partnership loss only up to your adjusted basis at year-end, losses above that carry forward, and you are responsible for tracking your basis. They also say the capital account on the K-1 cannot be used to determine basis.
Distributions generally reduce basis. The same instructions describe a taxable gain when distributions exceed your basis. Keep every K-1 and your own basis worksheet.
How do passive loss rules work?
Rental real estate is generally a passive activity, and passive losses generally offset only passive income. The IRS Publication 925 explains that rental activities are passive even if you materially participate, unless you qualify as a real estate professional. Disallowed losses carry to the next year.
The K-1 instructions give the order of loss limits: basis, then at-risk (Section 465), then passive activity (Section 469, Form 8582 for individuals), then the excess business loss limit. 26 U.S.C. 469 is the statute.
The $25,000 allowance and limited partners
A $25,000 allowance exists for taxpayers who actively participate in rental real estate. It phases down by 50% of modified adjusted gross income above $100,000 and is fully phased out at $150,000, and you must own at least 10% of the activity. Publication 925 and the statute both say limited partners are generally not treated as actively participating in rental real estate. Those sources speak of limited partners, and members of an LLC taxed as a partnership can be classified differently, so ask your CPA how your interest is treated. Do not assume a syndication loss will offset your salary.
In the example
If you had no other passive income in the example, your $3,500 loss would be suspended each year. After three years you would have $10,500 carried forward. If you had passive income elsewhere, the loss could offset it instead. Your CPA decides which applies.
What happens when the property sells?
At sale, the depreciation you took is taxed differently from the rest of the gain, and suspended losses can be released. The IRS says in Tax Topic 409 that unrecaptured section 1250 gain from real property is taxed at a maximum 25% rate, and that holding more than one year generally makes a gain long-term. That page also notes the net investment income tax may apply to significant investment income.
Under 26 U.S.C. 469(g), if you dispose of your entire interest in a passive activity in a fully taxable transaction to an unrelated party, losses can be treated as not passive. A sale of the property by the partnership is a different transaction from you selling your own interest, so ask your CPA how it applies to you.
| Piece | General treatment (confirm with your CPA) |
|---|---|
| Gain tied to depreciation taken | Unrecaptured section 1250 gain, maximum 25% federal rate |
| Remaining gain | Capital gain, rates depend on your taxable income |
| Suspended passive losses | Generally released on a fully taxable disposition of your entire interest to an unrelated party |
| Shorter-life property from a cost segregation study | Can be taxed differently from building depreciation. Ask your CPA |
In the example
Say you hold for three years and the sale allocates you $40,000 of gain, of which $27,000 is attributable to the three years of $9,000 depreciation. At a 25% maximum rate, the federal tax on the $27,000 piece would be at most $6,750, before state tax and the net investment income tax. The remaining $13,000 is other long-term gain. Your $10,500 of suspended losses could then offset some of this. These are round numbers to show the mechanics, not what you will owe.
When will I get my K-1?
Often after April 15, because partnerships can request more time. The Form 1065 instructions list March 15 as the due date for a calendar-year partnership, and a partnership can request an extension with Form 7004. Late K-1s are common enough that your CPA may file an extension for you.
Ask the sponsor when K-1s usually go out, and tell your CPA before you invest. If you use IRA money, ask a tax professional before investing, because leveraged real estate held in an IRA can create unrelated business income. The IRS says in Publication 598 that the unrelated business income tax rules apply to IRAs.
Our take
Our take: the most common beginner tax mistake is treating a paper loss as a win. A suspended loss is a deduction you may not be able to use for years, and it is repaid in part at sale. Do not invest for the tax effect alone.
For sponsors, we think the kindest thing you can do is publish the expected K-1 timing, and the CPA's contact, in the investor materials before closing. It turns a source of anxious emails into a calendar date. That is an opinion, and your CPA sets the actual schedule.
Trade-offs and who this is not for
Depreciation can defer tax, and deferral has a cost: basis shrinks, and the depreciation is taxed at sale. Passive loss limits can strand deductions. Tax rules also change, so this article is accurate as of October 2026 and may not be later.
This guide is not for anyone who wants an answer about their own return. Your CPA needs your income, filing status, other passive activity and state. It also does not cover real estate professionals, trusts, foreign investors or retirement accounts in any depth.
Common mistakes
- Assuming distributions equal taxable income.
- Not telling a CPA about the investment until K-1 season.
- Planning around a loss you are unlikely to be able to use.
- Not tracking basis year to year.
How DoorRaise fits in
We built DoorRaise for sponsors raising equity for apartment buildings with 5+ units under Rule 506(b) or 506(c). It is software, legal document preparation, escrow coordination and verification services, not a law firm, broker-dealer, investment adviser or funding portal. We give no investment, legal or tax advice.
Sponsors pay three flat fees and 0% of the raise or profits. At setup, $500 forms the deal's LLC and registered agent, prepares investor documents from attorney-approved templates, opens an escrow account in the deal's name and runs accreditation checks on every investor. At closing, $5,000 is paid from the funds raised, only if the deal closes. Then $3,500 a year is paid from the property's income and covers bookkeeping, the tax return and K-1s for every investor, payouts and updates, and final tax forms when the property sells. State filing fees are included in the $5,000 closing fee.
Ready to raise? Create your free sponsor page or see pricing.
FAQ
Do I pay tax on distributions?
Not directly. You report your share of the partnership's items from the K-1, which can differ from the cash. Distributions that exceed your basis can be taxable.
Why is my K-1 late?
A calendar-year partnership return is due March 15, but a partnership can request more time with Form 7004. Ask the sponsor for the expected date and ask your CPA about an extension.
Can I use losses against my salary?
Generally not. Rental losses are passive, and limited partners are generally not treated as actively participating for the $25,000 allowance. Ask a CPA about your situation.
Does investing through a retirement account change this?
It can. Leveraged real estate in an IRA can create unrelated business income, so talk to a tax professional first.
Is a preferred return taxed differently?
The pref is a payout priority. What you report comes from the K-1 allocation. See what is a preferred return.
Do I need a special CPA?
Not necessarily, but pick one who has handled K-1s from partnerships. Bring the operating agreement and the K-1 to your first meeting.
Sources
- IRS: Instructions for Schedule K-1 (Form 1065) (2025)
- IRS: Instructions for Form 1065 (2025)
- IRS: Publication 925, Passive Activity and At-Risk Rules (2025)
- IRS: Publication 527, Residential Rental Property (2025)
- IRS: Tax Topic 409, Capital Gains and Losses
- IRS: Publication 598, Tax on Unrelated Business Income of Exempt Organizations
- 26 U.S.C. 469: Passive activity losses and credits limited (Cornell LII)
The example is a simplified illustration with round numbers, not a projection, tax calculation or offer. This article is general information as of October 2026, not legal, tax or investment advice. Talk to a CPA about your own situation. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.