Investing in GP Fund vs deal by deal
June 19, 2024
Tired of waiting for your 2023 K-1s to arrive? It seems like every year the process takes longer and longer. Have you ever wondered why?
At investbase, we’re here to shed some light on this frustrating situation.
First and foremost, it’s important to understand that these documents aren’t created overnight. There is a lot of data that needs to be collected and organized before they can be sent. That’s why it’s important for investors to complete their paperwork in a timely manner when their GP asks for it.
In the following article, we shed more light on what K-1s are and why it may take a little longer to receive them. Here is a video summary by our CEO:
As an investor in a real estate syndication, you may receive a tax document called a K-1. While the following is not intended to be legal or tax advice, we want to help you understand how it works when you invest in a real estate syndication to give you a basic overview.
A K-1 is a tax document required by investors in pass-through entities, such as limited partnerships or LLCs, to prepare their taxes. The document covers the entity’s income, credits, and deductions for a given tax year. Most partnerships have their taxes prepared and filed by a CPA.
The K-1 typically contains basic information about the entity being filed, such as its name and address. It also lists any changes made during the year. For example, if the investment was originally structured as an LLC but changed to a corporation during the year.
In addition, a K-1 also typically contains financial statement schedules that show income (or loss) from various sources within the entity. This may include rental income from properties owned by the syndication, interest earned on loans made to other projects, or management fees charged to third-party investors.
Depending on the complexity of your syndication structure, there may be only one or two pages of financial statements in total — or there may be dozens.
Finally, the K-1 also typically contains any distributions the company made to its partners during the year. Here you will find information about how much money you received from syndication and in what form, as well as any special distributions made to anyone involved in the syndication outside of the usual partnership agreement (such as referral fees paid to partners for bringing in new investors).
The general delay of K1s at the beginning of each year is frustrating for everyone. However, as it is required, everyone will eventually receive their K1s — just not right away in January. It is important to have empathy for the GPs who are working hard to get them to you on time.
The beginning of a new year sometimes brings a slowdown in the preparation of K1s due to the many personnel and financial adjustments that need to be made at the start of a new year.
One of the reasons for delays typically is that GPs need to hire CPAs to get their taxes in order. The CPA needs last year’s financials before the end of January to properly organize all the financial information.
In addition, with a syndication, there is typically a cost segregation study that needs to be done to assist all responsible parties in completing and finalizing the K1s.
Depending on the type of property and when it was purchased, a cost segregation study may be required. This is a necessary step to get the most out of an investment, as it may allow for a significant tax deduction.
The cost segregation study is usually due no later than the end of February to coincide with the issuance of K-1s, but can be done earlier if the general partner is well prepared.
A cost segregation study is an engineering procedure that divides the components of a building into different categories. The purpose of this study is to identify construction costs within a commercial building that can be depreciated on a shorter schedule than the building itself. This may result in significant tax savings in the early years after purchase or construction.
The value of a cost segregation study comes down to money — cold, hard cash that goes back into your pocket in the form of increased tax deductions.
As an investor looking to invest in real estate syndications, it is important to have a clear understanding of the K1 reporting requirements. One of the most important elements is ensuring that accurate K1s are provided to investors by the general partner (GP).
The GP must be aware of the different types of K-1s that must be generated — there are three types of K-1 forms:
With all information from the investors ready, the GP can quickly and easily generate the correct K1s to return to the investors. Furthermore, generating K1s for these different categories requires an understanding of the tax laws that apply to each type of investor.
Finally, the GP must ensure that the required K1s are prepared quickly and accurately. This includes ensuring that documents are reviewed and updated on a regular basis and that the correct information is included in the K1s. The GP must also keep track of the K1s and ensure that they are returned to the investors as soon as possible. This will help ensure that investors receive the information they need to properly manage their investments.
K1s are an essential part of real estate syndications and it is important for the GP to have a thorough understanding of the requirements for each type of investor. By carefully following these steps, the GP can ensure that investors receive the K1s they need in a timely manner and that the cap table is properly managed.
It’s no secret that most CPAs are stretched thin due to constant changes in the tax code and a seemingly ever-increasing workload.
The Tax Cuts and Jobs Act of 2017 (TCJA), which went into effect in 2018, has created even more work for CPAs as they help clients comply with the new rules.
In addition to the additional workload, many CPAs are also dealing with a labor shortage.
With historically low unemployment rates, it is becoming increasingly difficult to find and retain quality staff. This is especially true in larger metropolitan areas, where the cost of living is high and there are more job opportunities.
The growing popularity of real estate investment is also putting pressure on CPAs. This has created a demand for CPA services that many firms are struggling to meet. As a result, many CPAs are working longer hours and taking on more clients than they can handle.
Consequently, the tax season around April is creating quite a stir as CPAs grapple with the new tax code, a labor shortage and the growing popularity of real estate syndications.
Again — this is not legal or tax advice! However, we want to emphasize that there is a way to ask for an extension if you don’t get your K1s on time. Despite the ideal of getting your K1s as soon as possible, life happens and sometimes it is necessary to file for an extension.
This is especially true for individuals who are just beginning to invest in real estate syndication and need more time to adjust and get used to the process. The IRS will give you until October 15th to file your taxes if you file for an extension by April 15th and the extension is granted.
All you have to do is fill out a form (4868) and send it in. However, if you expect to owe money, you might want to include a check or money order for the amount you expect to owe. You’ll also might want to include an estimate of the taxes you expect to owe for the current year.
The IRS is not a fan of extensions, but they understand that sometimes taxpayers need a little more time. The key is to request the extension before the deadline (April 15) and include an estimate of what you owe. If you do, it is possible that the IRS will grant you the extension.
As a passive investor, read emails from general partners carefully and complete investor portals in a timely manner. General partners often request important information from investors to keep the process running smoothly, so it is important to read their emails and complete their portals as requested.
This will ensure that all relevant information is shared in a timely manner. As an investor, you may be wondering what your general partner will ask you to do. Here are some examples:
Finally, we’d like to wrap up the article with the top tips for responsible investors during tax season:
By following the tips above, you should be able to navigate tax season well, enable your GP to expedite the issuance of K-1s, and file your taxes on time.
June 19, 2024
May 27, 2024
