Advice on Schedule K-1 real estate income for inherited apartment partnership - is this normal?

This is actually pretty normal for real estate partnerships, though frustrating for sure. What you're experiencing is called "phantom income" - where you're taxed on your share of the partnership's profits even though those profits weren't distributed to you. The partnership is likely using those profits for things like property improvements, mortgage payments, or building reserves. While these expenses may build equity or strengthen the partnership's position, they don't reduce the taxable income passed through to you on the K-1. You should check the other lines of your K-1 beyond just line 2. There might be deductions like depreciation (usually in box 13 with code I) or other expenses that could offset some of this income. Also look at your initial basis in the partnership (what it was valued at when you inherited it) and track changes to it - this will matter when/if you eventually sell your interest. One option might be to talk with the other partners about increasing distributions if there's sufficient cash flow. Another would be to see if someone wants to buy your interest, though as you noted, finding a buyer might be difficult if the properties aren't performing well.

I was in a similar position with a family real estate partnership and discovered https://taxr.ai which helped me analyze my K-1 situation. Before using it, I was totally confused by all the codes and what deductions I might be missing. Their system analyzed my K-1 forms along with my overall tax situation and identified that I wasn't properly accounting for passive activity loss limitations and basis adjustments. They explained how my partnership interest basis was changing each year, which ended up saving me about $1,200 on my taxes. The software broke down every line item on my K-1 and showed me exactly how it should be reported on my personal return, including identifying some suspended losses that I could use when I eventually sell my interest.

Just wanted to report back after trying taxr.ai for my K-1 situation. It was honestly eye-opening! I uploaded my past K-1s and discovered I've been misreporting my rental real estate income for years. The system showed me that I needed to be tracking my basis differently and identified some suspended losses I didn't know I had. The analysis pointed out that some of what I thought was regular income on my K-1 was actually rental income that should've been treated differently, and it gave me clear instructions for reporting everything correctly on my Schedule E. I'm actually going to amend my last year's return based on what I learned, which should save me around $900. What was most helpful was getting a clear explanation of why I was paying taxes on income I wasn't receiving and how that affects my investment long-term. Definitely recommend for anyone dealing with partnership K-1s, especially for real estate.

After struggling with K-1 issues from my family's real estate partnership for YEARS, I finally reached out to the IRS directly for guidance using https://claimyr.com to get through. I was planning to wait on hold for hours but Claimyr got me connected to an IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent walked me through exactly how to properly handle phantom income on my return and confirmed I needed to be separately tracking my basis in the partnership. They also explained that I should've been receiving an annual basis statement from the partnership to help with this (which I wasn't!). After the call, I contacted our partnership's tax preparer with my new knowledge and they admitted they hadn't been providing basis statements to partners. Now they're sending them out and I have a much clearer picture of my actual investment.

I have to admit I was completely wrong about Claimyr. After my skeptical post, I decided to try it myself since I had an issue with my K-1 that I needed to ask the IRS about. I was connected to an agent in about 20 minutes after previously spending over 2 hours on hold and getting disconnected TWICE when trying on my own. The agent I spoke with was incredibly helpful regarding my partnership tax questions. They clarified how to properly track basis adjustments when receiving phantom income and confirmed which forms I needed to file since my partnership has rental real estate income. They even explained how I could potentially claim suspended passive losses in the future. I probably saved 4-5 hours of hold time, not to mention the stress of worrying about getting disconnected again. For anyone dealing with partnership tax issues who needs to speak with the IRS directly, it's definitely a service worth considering.

Something nobody's mentioned yet is that you should request a copy of the partnership agreement if you don't already have it. When you inherited your share, it should have come with documentation about the partnership terms. Some partnership agreements actually restrict distributions and require capital reserves to be built up to certain levels before making distributions. This could explain why you're seeing income on the K-1 but not getting much in distributions. Also, check if there's a partnership meeting you can attend. As a partner, you generally have rights to information about the business operations and financial status. You might discover they're planning major renovations or have other reasons for retaining earnings.

Check out line 19 (distributions) of your K-1 and compare it to line 2 (real estate income). If line 19 is consistently lower than line 2, that means the partnership is retaining earnings rather than distributing them. This is common but can create tax headaches. Also, make sure you're tracking your "basis" in the partnership. Your basis increases when you report income from the K-1 and decreases when you receive distributions. This tracking is SUPER important because: 1) If you ever sell your interest, your basis determines your gain/loss 2) If your basis ever goes to zero, distributions become taxable 3) Certain losses can be limited based on your basis Most tax software doesn't handle basis tracking well, so you might need to maintain a separate spreadsheet or get professional help.