Real Estate Syndication Taxes and K-1s for Investors

How it is taxed

How are real estate syndications taxed?

A real estate syndication is usually taxed as a partnership, which passes income, deductions and credits through to investors. The deal does not pay federal income tax itself. Each year it sends you a Schedule K-1 (Form 1065), and you report your share on your own return. Tax shows up at three moments:

1. Every year you hold the interest. You report your K-1 share of income or loss whether or not the deal paid you cash. Early on, depreciation often turns that share into a loss.
2. When cash is distributed. A distribution is generally not taxed when you receive it unless it is more than your adjusted basis in the partnership (IRC 731).
3. When the property sells. You owe tax on your share of the gain, partly at rates that recapture past depreciation.

How much of the tax benefit reaches a passive investor depends on how each deal is built. Relli co-founder and CEO Mor Milo puts it this way.

"It does, however, depend on the structure. So if you're investing passively, you have certain deals that will give you access to some of that tax benefit and certain deals that won't."

Mor Milo, Relli co-founder and CEO, in Can Real Estate Investments Offer Tax Benefits? (May 14, 2026)

The rules below are the general federal picture for tax year 2026.

The form itself

What does a K-1 show for a real estate investment?

A real estate K-1 is the partnership's statement of your share of its results for the year. You use it to fill in your return and keep it with your records; you generally don't attach it. These lines carry most of the weight:

Item L is easy to misread. The IRS says it "can't be used to figure the partner's adjusted basis," so keep your own basis record from the first year.

Why is my K-1 late?

A late K-1 is usually a lawful one. A partnership can extend its return by six months with Form 7004, and it only has to furnish K-1s by the extended due date. For a calendar-year deal, tax-year-2026 K-1s can arrive as late as September 15, 2027.

Some investors already wait on another K-1, such as law firm partners investing in real estate. They can end up filing on extension because of one late form.

The delays have ordinary causes, according to Carta. The books close before the preparer starts, and tiered deals wait for K-1s from the partnerships below them. Many sponsors also extend as routine. On Relli, each sponsor sends its own updates and K-1s, so ask when its K-1s went out in past years.

Investors who expect a late K-1 commonly file Form 4868 and make an estimated payment. Form 4868 moves your filing deadline to October 15, 2027, but tax owed is still due April 15, 2027.

Passive loss rules

What are the passive activity loss rules?

The passive activity loss rules (IRC 469) say a loss from a passive activity can only offset income from passive activities. The statute counts any rental activity as passive by default, so the box 2 rental loss on a limited partner's K-1 is generally passive. Three rules decide what happens next.

• Passive losses offset passive income, such as K-1 income from another syndication or net rent from a property you own.
• A loss you can't use this year is suspended and treated as a deduction in the next year, with no time limit.
• Suspended losses are released when you dispose of your entire interest in a fully taxable sale to an unrelated party. In a syndication that usually means the deal sells the property and winds up.

Two limits apply first. A loss must fit within your basis, which includes your share of the deal's debt from Item K1. It must also fit within your amount at risk (Form 6198).

Can K-1 losses offset W-2 income?

K-1 losses from a syndication generally cannot offset W-2 income for a limited partner. Wages are nonpassive, and passive losses stay away from them until you sell your whole interest. The two exceptions people ask about rarely fit:

• The $25,000 allowance. Up to $25,000 of rental loss can offset other income for an owner who actively participates. The allowance phases out between $100,000 and $150,000 of modified adjusted gross income. The statute says no limited partnership interest counts as active participation, and owners of less than 10% don't qualify either.
• Real estate professional status. You need more than half of your working time and more than 750 hours a year in real property businesses. You also need material participation in the rental itself. Limited partners are generally barred from material participation, so the status seldom helps in someone else's deal.

Most syndications are limited liability companies (LLCs) taxed as partnerships. Whether an LLC member counts as a limited partner for these tests has been litigated, so the answer is "generally," not "never." This is not tax advice: ask a certified public accountant (CPA) how the rules apply to your facts.

Even a nonpassive loss meets one more cap, the excess business loss limit, now permanent. For 2026, net business losses above $256,000 ($512,000 joint) can't offset other income that year.

Carryforward math

What happens to unused passive losses on a K-1?

Unused passive losses carry forward until passive income absorbs them or you sell your entire interest. Here is one investor over a five-year hold.

Sale year

What taxes do you owe when a syndication sells?

When a syndication sells its property, you owe federal tax on your share of the gain for that year, reported on the final K-1. The gain is usually split into pieces taxed at different rates.

The 20% rate starts above $613,700 of taxable income for joint filers and $545,500 for single filers in 2026. The net investment income tax (NIIT) thresholds are not indexed for inflation. At the top, that is 23.8% on long-term gain and 28.8% on unrecaptured section 1250 gain. How cost segregation shifts gain into the ordinary-rate row is in the guide to depreciation and cost segregation.

The sale year also releases any suspended passive losses from the deal, as in the example above. And because your interest is in a partnership rather than in real property, you generally can't roll your share into a 1031 exchange.

What happens on your taxes if a syndication loses everything?

A total loss in a syndication generally produces two tax results when your interest ends. The passive losses you were carrying are released, and what remains of your basis becomes a loss on the interest itself.

• When your entire interest is disposed of in a fully taxable transaction, suspended passive losses can offset any income, wages included (IRC 469(g)).
• A loss on the interest is generally a capital loss. Net capital losses offset capital gains first, then up to $3,000 of other income a year ($1,500 if married filing separately).

The amounts and the year depend on how the deal ends: a sale at a loss, a foreclosure or a wind-up with nothing left. They also depend on your basis, which includes your share of the deal's debt. Keep every K-1, since together they record that basis, and have a CPA work through the final year. The guide to syndication risks covers the non-tax side of a deal that fails.

Other states

Do you have to file K-1 taxes in other states?

A syndication that owns property in another state can require you to file a nonresident return there. It may also send a state K-1 with the federal one. Rules vary by state, but these patterns are common.

• Many states let or require the partnership to file a composite return for nonresident partners, which can replace your own filing.
• Many states require the partnership to withhold tax on nonresident partners' shares.
• In some states a pass-through entity tax (PTET) election takes the place of the composite return.
• Your home state usually gives a credit for tax paid to the other state.

State loss carryforwards need their own paper trail. A state's rules can differ from the federal ones, so keep each state's carryforward with that state's returns until the deal sells. Separately, the 2026 federal cap on deducting state and local taxes is $40,400. It is reduced above $505,000 of income but never below $10,000. The 2025 tax law left PTET elections in place.

K-1 edge cases

Do you owe K-1 tax when the deal paid nothing, and do you get QBI?

Before you invest

Can you estimate your K-1 before investing?

You can estimate a K-1 before investing only roughly. Ask the sponsor how its recent deals reported and what it plans for this one.

1. What did investors' K-1s show in years 1 to 3 of your recent deals, per $100,000 invested?
2. Will this deal order a cost segregation study and take bonus depreciation?
3. In which month did your K-1s go out for each of the last three tax years?
4. Which states will investors file in, and do you file composite returns?
5. Do you expect any income to be unrelated business taxable income (UBTI) for IRA investors?

Treat every answer as an estimate: the partnership makes the tax elections, and each year's K-1 also depends on rents, expenses and the loan.