Understanding Your K-1
How well Is Your Investment serving You?
A Schedule K-1 form can be difficult to decode, but it holds valuable data relating to the health of your interest. Find out if your limited partnership interest is working for you with the help of our step-by-step K-1 breakdown. We have a great deal of experience in these matters and can provide an opinion on the taxes associated with the potential selling of an interest, however we do encourage all clients to consult with their personal tax advisors before finalizing any sale.
If the Final K-1 box at the top of the page is checked it indicates that the K-1 in question is the final K-1 for the partner listed in Box F. If it is indeed the final K-1 it would indicate that ownership was transferred to another entity (the entity would also receive a K-1 in this year), that the partnership interest was sold or that the partnership itself had been dissolved.
Net rental real estate income
Box 2 displays the limited partners share of the income or loss from the operations of the partnership. This number is used to calculate the income tax the limited partner must pay and is treated as ordinary income. Using the figure listed in our sample K-1 of $12,300, if the limited partner were in the 40% tax bracket (ignoring any other income or tax circumstances) the limited partner would owe $4,920 in Federal Taxes.
Box 19 is reserved for the total amount in distributions paid to the partner in the year indicated on the K-1. In our example the limited partner has received a distribution in the amount of $3,400. While this is substantial, it is not sufficient to cover the taxes due ($4,920 - see above). In other words, for this year the limited partner would have a net out-of-pocket loss of $1,520 as a result of his or her ownership of the interest.
The figures in Box J, taken together, break down the limited partner’s ownership percentage within the partnership. In a typical partnership all six percentages will be same, however they do occasionally vary, especially in older tax-shelter partnerships. In these limited partnership agreements there was usually included a conversion period where the division of the capital proceeds would change over time; most converting from a 99/1 split to a 50/50 split between the limited partners and the general partner respectively.
Capital Account Analysis
Finally, Box L shows the changes in the limited partners’ capital account for the year in which the K-1 has been issued. The first figure is the beginning capital account from the prior year. The remaining figures represent the effects of income and distributions, a calculus that eventually arrives at the final capital account for the year in question. This final capital account tabulation is a great indicator of what a partner’s taxable gain would be if the interest were sold. From a tax standpoint, a negative capital account is treated as a capital gain upon sale. Conversely, a positive capital account is treated as a capital loss if the interest is sold.
Need a more detailed explanation?
Please have your K1 available and contact us at your convenience.