Schedule K-1 vs. Form 1099: Real Estate Tax Considerations for RIAs & Family Offices
Schedule K-1 and Form 1099 report different information for real estate investors. Learn how you can use these forms in an investment strategy.
Real estate investors want to maximize their returns and have many options. They may invest directly in real estate projects, such as by purchasing a property to generate rental income or to renovate and sell. They may opt instead for passive returns by investing in a partnership or managed fund. Capstone Capital Partners offers passive returns through its Growth Fund, or investors may directly become lenders with the fractional loan program. Different types of real estate investments have different tax implications. This includes the type of tax form used to report gains, losses, income, and other information. Some investments result in a Schedule K-1, while others use Form 1099. Real estate investors must understand the differences between these forms. They may turn to registered investment advisors (RIAs) or family offices to help them plan their investments. This article will summarize the purpose of Schedule K-1 and Form 1099 and discuss their role in reporting income and other data from real estate investments.
Please note that recipients of Schedule K-1 and Form 1099 may be individuals or entities. For the sake of brevity, we may refer to recipients of these forms as “individuals” to distinguish them from the entities that prepare and send out the forms.
What are Schedule K-1 and Form 1099?
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Schedule K-1 and Form 1099 are IRS forms that serve different purposes. Neither type of form is inherently “better” than the other. Broadly speaking, Schedule K-1 is used for certain types of passive investments, while Form 1099 is used for a wide range of more active income types.
Schedule K-1
Certain “pass-through” entities, such as limited partnerships, trusts, limited liability companies (LLCs), or S corporations, use Schedule K-1. The form reports income, dividends, deductions, and losses to individual partners, beneficiaries, members, or shareholders. It reports “pass-through” income, meaning income that is directly taxed to partners, members, etc., rather than the entity itself.
Each individual with an interest in the entity receives a Schedule K-1. The individuals may include the Schedule K-1 with their tax returns, or they may include the K-1 information in their returns. The entity files a separate form and attaches copies of all the K-1s it produced. Partnerships, for example, file form 1065, while S corporations file Form 1120-S.
Schedule K-1 reports each individual’s investment or basis in the entity. If, for example, a partner contributed $75,000, their share of income in the first year is $15,000, and they made no withdrawals, Schedule K-1 for that year would show their basis as $90,000. Losses would result in a reduction in the individual’s basis. If an individual’s basis is zero, any payments that they receive might be taxable as regular income.
Income items that are typically reported on Schedule K-1 include an individual’s share of following:
Rental income
Dividends
Interest
Whether income reported in a Schedule K-1 constitutes earned income or not depends on the individual’s role in the entity. If they are passive, such as a limited partner, it is likely to be considered unearned income. Active investors and general partners may have earned income on Schedule K-1, which might mean they owe self-employment tax.
Real estate investors may receive Schedule K-1 for investments in real estate partnerships, syndications, or real estate investment trusts (REITs). Capstone’s Capital Fund uses Schedule K-1 for investors because of their passive role. They invest in the fund and receive returns from a wide range of loans that Capstone manages.
RIAs and family offices may find that investments with Schedule K-1 offer tax planning opportunities. The form reports income and tracks the value of an individual’s investment. At the same time, Schedule K-1 can make recordkeeping and reporting more complex. The information in the schedule may need to be transferred elsewhere.
Form 1099
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Form 1099 reports various types of non-employment income paid to individuals. This may include rent, interest, and dividends. Unlike Schedule K-1, Form 1099 only tracks income that an individual receives directly. It does not track gains, losses, deductions, or reductions in basis.
The IRS offers multiple types of Form 1099 for different types of income. Real estate investors might receive the following forms:
Form 1099-MISC: Rental income and other payments
Form 1099-S: Realized gains from the sale of real estate
Form 1099-INT: Interest income from investments
Form 1099-DIV: Dividends from investments
Other types of Form 1099 report income from payment processors, unemployment benefits, retirement benefits, and freelancing activities, to name a few.
Capstone’s fractional lending program issues Form 1099. Individuals who participate in the fractional lending program take a more active role than those who invest in the Growth Fund. The program allows them to research available loans and step into the role of the lender. Form 1099 reports the interest income they receive.
Form 1099 generally covers income from direct ownership of real estate, such as rental properties that produce rent revenue. RIAs and family offices may find that Form 1099 is a helpful source of income information for the purpose of calculating tax liability.
How are Schedule K-1 and Form 1099 different?
The following are the key differences between Schedule K-1 and Form 1099:
Ownership
Schedule K-1 applies to indirect ownership, such as through a partnerships, limited partnership, or LLC.
Form 1099 applies to direct ownership of property or payments received as an individual.
Tax reporting
Schedule K-1 reports pass-through income. Instead of the entity paying taxes, taxes are paid at the level of the partner or member.
Form 1099 reports income that an individual receives directly, and which is taxable in the year the individual receives it.
Complexity
Schedule K-1 makes detailed allocations of gains and losses. This makes it useful for more complex investments.
Form 1099 provides a straightforward report of an individual’s gross income.
Timing
Schedule K-1 is often delayed because of the amount of information involved. This can complicate tax filing schedules and deadlines.
Form 1099 is supposed to go out on or before January 31. This can help ensure timely filing of individual tax returns. Note that taxpayers are responsible for reporting income on their returns whether they receive a Form 1099 or not.
What are some tax considerations for RIAs and family offices?
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Tax planning
Schedule K-1 can help RIAs and family offices track gains and losses and leverage deductions and credits.
Form 1099 is useful for tracking and managing cash flow.
Compliance issues
Delays in the issuance of K-1s can make it more challenging to ensure accurate and timely tax filings.
Building and maintaining a diverse investment portfolio can make it difficult to coordinate tax strategies. Advisors must plan to incorporate both tax forms.
Practical tips for RIAs and family offices
The following tips can help RIAs and family offices take advantage of both types of tax forms when advising clients on investments:
Organization
Schedule K-1 and Form 1099 both report critically important information, but they do so in very different ways. Developing systems that can track and record both types of forms will streamline the process of advising clients.
Communication
These forms produce a vast amount of information. The full implications of this information for a client can be difficult for any one professional to analyze. Communication with CPAs and tax advisors can help you ensure that you are providing an accurate interpretation of the data. It can also help you apply that data in the ways that are most beneficial to your clients.
Keeping tax professionals in the loop can also help with providing effective tax planning and maintaining compliance. The sooner you can consider the tax implications when evaluating a real estate investment, the more effective you will be as an advisor.
Planning
Tax filings often depend on receiving Schedule K-1 and Form 1099 in a timely manner. While Form 1099 has a nominal deadline of January 31, Schedule K-1 often takes much longer to prepare. You can anticipate and prepare for delays by building flexibility into your clients’ tax filing schedules.
Learn more about Capstone Capital Partners’ investment opportunities
The distinctions between Schedule K-1 and Form 1099 are essential for effective tax planning in real estate investments. Capstone Capital Partners allows Texas investors to access hyperlocal trust-deed and first-lien investments. We encourage RIAs and family offices to work closely with tax advisors to find ways to optimize tax outcomes for their clients. Properly managing these forms can enhance the value of real estate portfolios. To learn more about what the Capstone team can do for you and your clients, please contact us today through our online contact form.
