As Benjamin Franklin noted, “…in this world nothing can be said to be certain, except death and taxes.”
If you had your W-2 form, the IRS was willing to accept your tax return as early as January 28. But for CRE investors who invested in an LLC in 2018, a key form, known as Schedule K-1, is likely to have a significant impact on your personal tax return this year.
We invited Trent Baeckl, CPA, Shareholder, Perkins & Co. to co-host a webinar on CRE tax fundamentals. Our goal was to walk our investors through their 2018 Schedule K-1 and use hypothetical scenarios to explain what kind of impact your CRE investments might have on your return this year.
Here are a few key takeaways:
1. An LLC allocates a Net Rental Real Estate Income (Loss) amount to each investor based on the profit and loss allocation provisions in the LLC’s operating agreement. It may be as simple as multiplying your percentage ownership to taxable income or loss for the LLC, but some agreements allow for partners to share in profits and losses differently. Investors can refer back to their LLC’s operating agreement to understand how their allocation was determined.
2. A property may have a positive cash flow but still generate tax loss due to depreciation. Operators can maximize depreciation with a cost segregation study, which is especially helpful for accelerating depreciation on a multifamily property.
3. If someone invests in a stock, their basis remains constant from year to year. With real estate investments, your basis will change each year. Basis is calculated by adding capital contributions, income/gain allocations and liability allocations and then subtracting distributions and loss/deduction allocations. This is important because distributions are tax free to the extent of basis,
4. Investors can carry a passive loss forward from year to year and use passive losses to offset future income.
5. Investors who are invested in an LLC will get a Schedule K-1. Meanwhile, a Modeled after mutual funds, a REIT (real estate investment trust) is a company that owns, operates or finances income-producing real estate. They allow individual investors to buy shares in commercial real estate portfolios.... More sends a 1099 and that is considered taxable as dividend income.
6. Don’t forget to consider the state tax implications of your LLC investment. If you invest in a property outside of your home state there may be additional tax and reporting requirements.
Last December, Congress passed the most substantial tax reform legislation since 1986 with the Tax Cuts and Job Act of 2017 (“TCJA”). Trent and I took an in-depth look at how this legislation impacted investors and you can watch that webinar here.
We also have the following tax resources available on our website: