Posted over 4 years ago

Investment 101: Where’s My K-1?

It’s tax time. You’ve received your W-2. You’ve assembled your 1099s. You have 1,000 receipts to back-up your business deductions, and you’re logged into TurboTax ready to file your tax return—until it hits you: “Where the heck is my K-1?”

First off, know this: you’re not alone. Investors all over the country are likely frantically calling their fund managers and financial advisers right at this very moment with the exact same question. And they’re also likely to hear the same answer: “We are working on it.” When it comes to investments that offer an ownership stake or profit-sharing, the process often involves numerous layers of financial reporting. The very first person or entity to provide that information via a K-1 is typically not required to issue it until March 15th, thus delaying the issuance of the K-1’s by subsequent ownership layers.

If you’ve made a direct investment in a specific asset, such as a healthcare facility or storage space, the March 15th deadline may not be such a problem for you. The owner crunches the numbers and lets you know what gains or passive losses to report. But if you’re involved in an equity or crowd-funding project, or an investment with multiple partners/owner layers, you’re likely one of many investors still waiting on those final numbers. And depending on your capital partner’s position, you may be second or third in line to receive them.

The following are some questions often heard the most regarding the K-1 process:

Can I file for an extension due to a late K-1?

Yes. This is a common issue for those investing in equity funds and other profit-sharing opportunities. You will not be penalized for filing late due to a missing K-1 as long as you file an extension before the filing due date.

Is a K-1 the same as a 1099?

No. Income fund investors who receive income without ownership generally will receive a 1099. 1099s are much simpler to produce and are due from the issuer by January 31st. Equity investors, however, have gains and losses that are far less black and white. Their earnings depend on a range of different issues, such as their ownership stake, depreciation, and how profitable the investment has been throughout the entire year. The K-1 for a “successful” fund may even result in passive losses, which is a tax benefit rather than a tax liability. So be patient: your K-1 is definitely worth the wait.

Is it my adviser or fund manager’s fault that it’s late?

The Fund Manager or Financial Intermediary certainly has a level of responsibility to issue K-1’s in a timely fashion. Failure to do so, without filing an extension with the IRS would be a dereliction in their duties. However, when the Fund-level or Investment-level K-1 that will be provided to the investor is dependent upon the timely issuance of K-1’s from other entities in the investment that the Fund Manager or Intermediary does not control, there is not much they can do until they receive all sub K-1’s.

If my K-1 shows a passive loss, does that mean I made a bad investment?

Losses on a K-1 do not necessarily indicate the actual performance of the underlying investment. Often, such losses are caused by depreciation, write downs, or other events that affect the book value of the asset. They are traditionally called “paper losses” and can provide a great tax benefit for investors. If you’re investing in new construction, for instance, you may not see gains until two or three years into the investment, simply because the community/store/hospital is not up and running yet. Your fund manager or financial adviser should be able to explain the value of these “passive losses” to your investment portfolio.

Long story short: There are thousands of people just like you who file extensions when a K-1 is late. It may be frustrating, but it’s a common part of the real estate investment process, particularly new development and layered ownership transactions.

Jess Stonefield is a contributing writer on aging, technology, mental health and the greater longevity economy for publications such as Changing Aging, The Mighty and Next Avenue. She is passionate about impact investing and the greater concept of “equitable equity” — spreading wealth to all levels of our society. She is a communications expert for Senior Living Fund.