Dissecting and Understanding a Schedule K-1

[Kurt Granroth]

I just got my first K-1 from a multi-family syndication and want to understand it.  This is the actual K-1 with real numbers and only personally identifying elements have been removed.  I'm going to describe what I think I understand and then followup with questions.  I am super green when it comes to this, though, so don't assume for a second that I actually know what I think I know -- I value any and all corrections!

Starting with section J, describing my share of the profit, loss, and capital.  They are all 0.2059%.  As far as I can tell, these are strictly informational and have absolutely no impact on taxes whatsoever.

Next up, there's section K, where I see a Qualified nonrecourse financing value of $81,639.  This is my share of the debt (loan) on this apartment.  Being that's it's "qualified nonrecourse", I will never be personally responsible for that debt.  This is not a taxable amount... but I've seen a couple references that this might be used when factoring the tax basis?  The use of this field is mostly a mystery to me.

Section L is very important in that it's directly referencing the "tax basis".  Since the tax basis plays a huge role in determining what is taxable and what is not, it's very important to know what this is.  Here's how I am interpreting it.

This is my first year, so my tax basis is either my beginning account ($0) or my initial capital ($50,000).  The tax basis for next year(?) is my existing basis plus or minus the net income (-$30,690) and minus any distributions ($1,841).  That leaves me with a tax basis for 2019 of $17,469.

In Part III, we see in line 2 that my share of the income is -$30,691.  That's $1 less than the amount in the tax basis calculation, so maybe it includes the $1 interest income (line 5) but interest isn't part of the tax basis?  Since it is a loss, I can use it as a deduction against future earnings.  It can ONLY be used against passive earnings and not against any of my earned income or other capital gains.  It's not clear to me if it can only be used against this specific property or if it can be used against any passive income (another syndication, perhaps).  Since I have no positive earnings, I can carry this over into future years, indefinitely.  Is the amount that I can use in a year limited by my tax basis, maybe?

Line 2 is the primary "taxable" amount shown on the K-1.

Line 5 is interest -- that's akin to a 1099-INT.

Line 19 is the cash distributions I received over the year. Distributions ($1,841 in this case) are not directly taxable and won't flow down to my 1040.  However, the distribution is directly used when calculating the tax basis and the tax basis does have a huge say in how much of the income is taxable, so it may be considered indirectly taxable?

Line 20 refers to Section 199A items.  Are these informational?  Maybe used for calculating a "qualified business deduction", but not now because there was no profit.  I don't know for certain how they come into play.

A refers to the $1 in interest.

Z is the actual income coming from the property (essentially just Line 2)

AA has $484 of "W-2 Wages".  Huh?  No idea where this is used.

AB has $103,328 of an "Unadjusted Basis".  I have no clue how this is calculated or how it is used.

Okay, that's it for this year.  Since my income is negative, there's nothing to tax and so it has no material impact on my taxes this year (other than the $1 in interest).  I will save off the $17,469 as a tax basis and carry over $30,691 to use in future years.

So now it's 2020 and I get my 2019 K-1.  In this hypothetical future, I see my first profit of $20,000 in Line 2 and I have distributions in Line 19 of $4,000.  I am now going to wave my hands around and proclaim things -- please challenge anything that is not completely true!

My tax basis for 2019 is $17,469 so I subtract that from my $20,000 profit to leave $2,531 of taxable (ordinary) income.  However, I still have the carryover from the 2018 and so I deduct $2,531 from $30,691 leaving me with $28,160 to carry forward.  My taxable amount is still $0.

I calculate my new tax basis with a starting value of $17,469 + $0 additional capital + $20,000 in income - $4,000 in distributions, leaving me with a new basis of $33,469.

Now it's 2021 and I get my 2020 K-1.  My profit this year on Line 2 is $50,000 and I get $5,000 in Line 19 distributions.  I subtract the $33,469 tax basis to get $16,531 of taxable income.  I use up more of my carried over loss from 2018 leaving me with $0 in taxable income and still $11,629 in loss for future years.

My new tax basis is $33,469 + $0 + $50,000 - $5,000 = $78,469

After three years, I've received $10,841 in payments without paying any taxes at all and with my current tax basis and remaining loss, I'd need to receive $90,098 in income in year four to have any taxable income.

Some or much of this is undoubtedly wrong.  I'd appreciate knowing where and how!