K-1 Losses in Multifamily Investing

​Disclaimer: I am not an attorney or CPA. My knowledge in this post comes from my own investing experience. Please consult your own attorney and/or CPA on your specific investments.

The tax advantages of multifamily investing, including K-1 losses, are what make this kind of real estate investment so attractive. A Schedule K-1 is a tax document that reports the income, losses, credits, and dividends of each investor’s share of the investment.

Each individual investor receives their own Schedule K-1. This is how it’s possible that multifamily real estate investors receive tax benefits, and not just the sponsor themselves.

Receiving a K-1 Loss from a Multifamily Investment

K-1 Loss Benefits for High Income Earners

Thanks to tax advantages like K-1 losses, depreciation, and cost segregation studies, legislators have built the tax code to specifically incentivize real estate investors for the sake of the economy. These tax codes allow investors to invest more capital and sponsors to buy more buildings while taking advantage of lower taxes.

Compared to a high income earner, a real estate investor could be enjoying significantly more tax benefits. If you have a high W2 income from dentistry, the medical field, professional consulting, etc., then you are paying out from a much higher tax bracket. Having a multifamily real estate investment reduces your taxable income, meaning you could be making the same from your employment but using a K-1 loss to write off some of that taxable income.

This is possible when either you or your spouse are a materially participating real estate professional (MPREP) with 750+ hours in real property trades in a year and have passed one of the seven tests of MPREP.

Multifamily Investing K-1 Losses and Tax Reduction

Let’s illustrate the scenario above for a high income earner with a simple example:

• Without multifamily investing: A CFO makes $300,000 and pays out $105,000 in taxes per year. He has no real estate investment vehicles or other investments he can use to reduce his taxable income. After taxes, his take-home pay is $195,000.
• With an investment in multifamily real estate: The same CFO still makes $300,000, but is able to reduce his taxable income by using the K-1 loss from his multifamily real estate investment. The K-1 loss of $98,000 taxes reduces his taxable income to $202,000 and places him into a lower tax bracket. His taxes are reduced to $64,640. HIs take-home pay is $235,360.

These two scenarios, with the same high-income earner at the same job, shows a difference of $40,360 in tax payments through using the tax advantage of multifamily real estate investing. That difference could be what your family needs to start living a true life by design.

Disclaimer: Again, I want to remind you I’m not a CPA or attorney, and I’m just sharing what my own experience has been in multifamily real estate investing. I myself have gone from earning a high income and writing the check for a high tax payment one year, and then another year using my multifamily real estate investing to lower my taxes on the same amount of income. The boost in take-home pay was life-changing!

K-1 Losses from Multifamily Investments: Further Resources