What Limited Partners Can Expect During Tax Season

[Lauren Brychell]

Tax season may be a few months away still, but what should you expect if you're a first-time limited partner?

What to Expect: Equity Investors

As an equity investor, you will receive a K-1 from your operator/sponsor. The Schedule K-1 is typically between one and four pages long and reports your share of income, losses, and dividends.

As a rule of thumb, you should receive one K-1 per investment unless your sponsor files composite returns. 

In your first year of investing, you should see losses from depreciation. One of the most significant benefits of investing in real estate is depreciation and it allows you to write off the cost of the physical devaluation of a property — all while your asset is likely gaining value in the market.

This is the last year (2022) for the 100% bonus depreciation tax benefit introduced under the Tax Cuts and Jobs Act (TCJA) of 2017. Starting in 2023, this will drop to 80% and fall another 20% every year after.

Now is a great time to reach out to your sponsor and ask when you will see your K-1 for 2022. The anticipated delivery date may inform whether or not you file for an extension. Filing for an extension is typically a no- or low-cost option that removes the stress of gathering multiple K-1s or 1099-INTs before the April deadline. This, in turn, can reduce costly errors or omissions. As a wise accountant once told me, “It’s better to extend than amend!”

What to Expect: Debt Investors

If you have invested in private debt opportunities, you will receive a 1099-INT. Your 1099-INT will list the amount of interest earned in the tax year. Per the IRS, you must receive your 1099-INT no later than January 31, 2023.

Make sure to review this document for accuracy as soon as you receive it. Check with your CPA to ensure that your operator has your correct taxpayer identification number (TIN) and entity name, as there will likely be a delay in filing to make corrections.

Likewise, if you are planning on any entity transfers, don’t wait until the new year — start getting your paperwork in order now.

Tax Season Checklist for Passive Investors

Have you invested in a syndication, private debt, or a fund this year? Here are some steps you can take to get organized ahead of your filing deadline.

• -Let your CPA know that you invested as a limited partner in real estate.
• -Ensure that your operator has your correct TIN, address and entity name.
• -If you are investing with a self-directed retirement account, ensure you correctly identified the TIN and titling.
• -If you expect to receive your K-1 late, communicate to your CPA that you will need to file an extension.
• -If you plan to retitle your investment, get started now.
• -Get your paperwork in order if you plan to make a Roth conversion.
• -As soon as your K-1 or 1099-INT is delivered, check for accuracy and notify your operator immediately if something is incorrect.

Important Dates for 2023

• March 15, 2023: Filing deadline for passthrough entities (partnerships, multi-member LLCs, and S-corporations). A six-month federal extension to September 15, 2023, is available (state extensions will vary.)
• April 18, 2023: Filing deadline for C-corporations and individuals. A six-month federal extension to October 16, 2023, is available (state extensions will vary.)
  
  

Preparing For a Smooth Tax Season

Whether you’re a new or seasoned investor, tax season can be stressful to navigate. It pays off to begin laying the groundwork early and to know what to expect.