One of the most frustrating parts of investing in real estate syndications can be managing delayed K-1s. While Holdfolio strives to only invest with sponsors who deliver K-1s on time,, through our experience we’ve learned that a delayed K-1 is inevitable.
This article will help you understand how to manage this process in order to minimize stress and disappointment.
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Most Common Reasons Why K-1s are Delayed
While the majority of investments deliver K-1s on time, a delayed K-1 document may be due to …
- Whether it’s the first return for that particular investment. The CPA has a large amount of initial setup work to complete for the tax documentation of each new investment and requires more time for the very first partnership return.
- Cost segregation studies. Cost segregation studies are a way for real estate investors to more quickly deduct the depreciation of a property against the taxable income. Rather than depreciating the property as a whole over 27.5+ years, a cost segregation study breaks down a property into its different components (electrical, HVAC, plumbing, etc.), depreciates the components over shorter useful lives, and takes bonus depreciation where applicable. Not only are cost segregation studies very intricate and time-consuming matters, they are often performed by outside qualified companies, which can further add to delays.
- Human resources. Due to the extensive hours and stress caused by the peak season, the accounting profession is seeing a mass exit of CPAs from the public accounting world. With this exit, further stress and work is being piled on the remaining accountants. Every return comes with it’s own set of unique circumstances, which often requires additional research and understanding.
- Reliance upon multiple resources. Not all real estate investment firms are vertically integrated with their own property management, accounting, and other divisions. With this, they must rely upon other companies for information before completing certain tasks.
Your Options When a K-1 is delayed
In the case that your K-1 is delayed but you need to begin filing your taxes, you can…
- File an extension
- File your return, then file an amendment
The preferred method is to file an extension, however, if you have an urgent circumstance that requires a tax return, such as qualifying for a loan, then you can file your return without the K-1 and amend the return later in the year once you have it.
In both scenarios, you should first try to understand whether the K-1 you’re expecting will increase or decrease your tax liability. In other words, will the K-1 show a profit or a loss?
For the majority of real estate syndications that Holdfolio invests in, even those which make distributions during the year, the K-1 will show a loss and therefore decrease your tax liability. This is referred to as a “Paper Loss” which will offset other investment income and is one of many benefits of this type of investment.
If the property was sold during the tax year then it is almost certain to show a profit on your K-1 and increase your tax liability.
Please feel free to ask our investor relations team to provide you with an estimate of whether the K-1 is expected to increase or decrease your tax liability. Knowing this will help you navigate a tax extension without any penalties or interest.
Filing a tax extension is the easiest way to manage delayed K-1s. You can file an extension and avoid any additional fees and penalties.
Here are some best practices when filing tax extensions
- File before the tax extension filing deadline.
- A tax extension does not grant you additional time to pay your tax liabilities. If you are expecting a tax liability, you must pay this estimated tax prior to the tax return filing deadline.
- If you know you will be getting a refund, you won’t need to worry about paying any estimated taxes when you are filing an extension.
- If you think you will owe additional taxes and your delayed K-1 is expected to decrease your tax liability, then the most conservative approach is to pay the estimated tax liability that your tax professional has calculated on or before you file your extension. If your K-1 reduces your tax liability then you will be issued a refund when you file your tax return.
- If you think you will owe additional taxes and your delayed K-1 is expected to increase your tax liability, then you should pay the estimated tax liability that your tax professional has calculated on or before you file your extension. It’s important to share an estimate of how much profit your K-1 will generate with your tax professional so they can properly estimate your tax liability. Remember to ask our investor relations team to provide you these details if required. If you overpay your tax liability, then you will be issued a refund when you file your tax return. If you under-pay, then the IRS will apply penalties and interest on the unpaid balance.
Tax Filing Deadlines
When you invest with Holdfolio you are taking ownership in a partnership. The partnership files its return and issues each partner (investor) a K-1 tax form.
The deadline for partnerships to file their tax return is typically March 15th, or the next business day if it falls on a weekend or holiday.
The partnership can elect to file a 6-month extension.
The deadline for individuals to file their tax return is typically April 15th, or the next business day if it falls on a weekend or holiday.
Individuals can elect to file a 6-month extension.
Are There Penalties for Filing a Tax Extension?
There are no penalties for filing a tax extension. However, not paying your estimated tax liability on time, or failing to file altogether, may cost you significantly.
- If you don’t pay the full amount you owe, the IRS will charge you interest on the unpaid balance until you pay the full amount.
- If you don’t pay at least 90% of the amount you owe, you may also be subject to a late payment penalty. The penalty is usually half of 1% of the amount owed for each month, up to a maximum of 25%.
- If you don’t file either your return or an extension by the tax filing deadline, you’ll be subject to a late filing penalty. The penalty is usually 5% of the amount you owe for each month, up to a maximum of 25%.
How to File a Tax Extension
The quickest and easiest way to file an extension is through the use of one of the many resources made available by the IRS. Individual tax filers, regardless of income, can use IRS’ Free File to request an automatic tax-filing extension electronically.
An extension payment can also be made through the IRS’ Direct Pay using the Electronic Federal Tax Payment System (EFTPS) or with a credit or debit card.
When making a payment through Direct Pay, be sure to indicate that the payment being made is for an extension for the specific tax year. If this is properly indicated when making your payment, you won’t have to file a separate extension form and you’ll receive a confirmation number for your records.
If you use a tax professional for the filing of your taxes, they should be able to use their tax software to file an extension for you electronically. This service can come with its own fees, so be sure to consult with your tax professional prior, and if you are not willing to pay fees for the extension filing, then you can consider using one of the free resources noted above.