For a Syndication LP--Is Return of Capital Visible via K-1?

Question

Hey guys,

Another question today about the details of your K-1 and whether or not I can peek under the hood.

Does anyone know if it's visible on a K-1 document whether or not you are receiving your own capital back (thus decreasing your capital in the deal) or if your capital coming back is classified as a return on your original capital?

I haven't really been able to find this detail anywhere, and I'm not sure if there is any visible differentiation. Just curious if anyone knows if there's a way to view the K-1 or capital account to be able to tell.

Thanks in advance,

Basit Siddiqi · Answer

@Jordan BurnettThe K-1 will not tell you what your return on investment is. That is a communication between you and the sponsor.The K-1 will tell you what payments were made from the partnership/LLC to you which is mentioned on line 19.

Daniel McNulty · Answer

@Jordan Burnett

Box 19 is simply a capital movement box. It does not reflect the taxable nature of that distribution (generally). Partnerships are pass through entities, so you will pay taxes on the operating results of the partnership every year and not necessarily on the distribution amounts as is customary in C corp investments (like stocks) that do not pass through. By the time you distribute the proceeds, you will theoretically have already paid taxes on it, thus it is normally not taxable.

There are always exceptions, so have a chat with your accountant if you want to really dive in the details.

Alberto M. · Answer

@Jordan Burnett

Hi Jordan, I’m not a tax expert and you should definitely ask that question to an accountant. However, based on my personal experience, and as Taylor mentioned, you can report your capital distribution in your K-1 regardless if it’s at a capital event or during the Holding period.

My only piece of advise would be to try not to do so, as then you will have to pay taxes on the capital gains.

It’s always best to distribute the cash flows during the Holding period as it can be diluted with some depreciation (to reduce your tax exposure) and then when you are ready to sell, you reinvest your capital gains into an opportunity zone or through a 1031 exchange and can defer paying most (if not all) capital gain taxes.

Hope it helps.

Jordan Burnett · Answer

Thanks, how about on a K-1 during the hold? My understanding is the distributions will be in Box 19, but I'm not sure if there's a way to tell whether they're categorized as return of capital or return on capital (or if there's no distinction).

Taylor L. · Answer

Disclaimer: not a tax pro

I looked at my last K-1 from an exit, it shows a distribution in box 19 of the full amount, and in box 10 the Net section 1231 gain, along with changes shown in box L's Partner Capital Account values. I would expect the return of capital to be reflected in this boxes at a minimum. We may get a tax pro to chime in here as well.

For a Syndication LP--Is Return of Capital Visible via K-1?

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