How K-1s, Depreciation, and Tax Strategy Work in Real Estate Syndications
Real estate syndications offer powerful tax advantages. Here’s what passive investors should know about K-1s, depreciation, and how it all works.
One of the most compelling—but often misunderstood—benefits of real estate investing is its tax efficiency.
If you’ve never invested passively before, you might wonder what happens at tax time. Here’s a simple guide to how depreciation, K-1s, and tax treatment work in multifamily syndications.
What’s a K-1?
Each year, you’ll receive a Schedule K-1 from the sponsor.
This document:
Reports your share of income, losses, and deductions from the investment
Is used to file your personal tax return (typically as part of your LLC or individual return)
Usually arrives around March or April
It’s the equivalent of a 1099—but designed for partnership-style investments like syndications.
How Does Depreciation Help You?
Real estate assets are depreciated over time on paper—even if they’re actually appreciating in real life.
That depreciation often offsets the taxable income you receive, meaning:
You may collect cash flow but show a paper loss on your K-1.
This reduces your tax liability during the hold period.
What About Cost Segregation and Bonus Depreciation?
Some sponsors use cost segregation studies to accelerate depreciation in the early years of ownership.
This results in:
Larger paper losses in year 1–3
Increased potential for “tax-sheltered” cash flow
The possibility of “phantom income” later if not managed properly
Ask your sponsor:
Are you doing a cost seg study?
How much depreciation loss is expected in year 1?
What happens at sale? (Hint: depreciation recapture may apply)
Do I Need to Be an Active Investor to Benefit?
No—passive investors still benefit from depreciation. But the impact depends on your overall tax situation.
Are you a real estate professional?
Do you have other passive income to offset?
Are you investing through a self-directed IRA?
Your CPA can help tailor the strategy—but understanding the basics helps you ask better questions.
Final Thought
K-1s and depreciation can make real estate investing far more tax-efficient than stocks or mutual funds. Ask your sponsor how they handle tax strategy, and bring your CPA into the loop early.
