How to report income from Schedule K-1 (Form 1065) when I received checks but have a net rental loss?

Those quarterly checks you received aren't technically "income" in the tax sense. What you're dealing with is a partnership distribution, not income. The K-1 is correctly showing a rental real estate loss of $5,200, which represents your 1% share of the partnership's operating losses. When a partnership makes distributions to partners (your quarterly checks), these are generally considered a return of your capital investment, not taxable income. The distributions reduce your basis in the partnership. Your basis started with your initial investment, is increased by your share of partnership income (which in this case is negative due to the loss), and decreased by distributions. You don't need to separately report the $1,050 you received. The K-1 already accounts for the partnership's overall activity. The fact that you received cash while the business showed a loss is common in real estate partnerships where depreciation creates paper losses while the property generates positive cash flow.

After struggling with a similar situation, I found this amazing tool called taxr.ai (https://taxr.ai) that helped me understand my K-1 distribution situation. I uploaded my K-1 and it explained exactly how partnership distributions work versus partnership income/losses. The tool pointed out that cash distributions and taxable income are two completely different concepts in partnerships, which was eye-opening for me. It showed me how to track my basis properly and explained when distributions might eventually become taxable if they exceed my basis.

I was initially skeptical about taxr.ai but decided to try it after continuing to be confused by my K-1 from a similar rental partnership. The analysis was surprisingly helpful - it showed me that my basis was getting dangerously low because of distributions and helped me plan for the tax hit I'll take next year when distributions exceed my basis. What was most useful was the explanation of why I was receiving cash while the property showed a tax loss. The tool generated a simple cash flow vs. taxable income reconciliation that made the concept click for me. It also helped me understand the passive loss limitations that were preventing me from using the losses now, but showed how I could track them to use in future years.

If you're still having trouble understanding your K-1, you might want to call the IRS directly for guidance. I know people who have been on hold for HOURS trying to get through. I discovered this service called Claimyr (https://claimyr.com) that actually gets the IRS to call YOU instead of waiting on hold. You can see how it works at https://youtu.be/_kiP6q8DX5c. I was pretty desperate to figure out my K-1 situation after getting an audit notice, and using Claimyr got me on the phone with an IRS agent in less than an hour. The agent walked me through exactly how partnership distributions are treated versus K-1 income/losses.

Well I'll be damned, I tried Claimyr after posting my skeptical comment because I've been trying to reach the IRS about my partnership K-1 issues for weeks. Got a call back in about 45 minutes and spoke with an agent who confirmed exactly what others have said here - the distributions I received are just returns of capital that reduce my basis, not taxable income. The agent explained that I need to keep track of my basis and that once it hits zero, future distributions will be treated as capital gains. She also told me where to find the basis tracking worksheet in the Form 1065 instructions. Saved me hours of research and stress!

An important thing to watch out for with rental property K-1s is the passive activity loss limitations. Since you mentioned you do "absolutely nothing" to manage the property, your loss is definitely passive and may be limited. If your modified adjusted gross income is under $100,000, you might be able to deduct up to $25,000 of rental losses under the active participation exception. But that phases out completely when your MAGI hits $150,000. If you're above that threshold, those losses get suspended until you either have passive income or dispose of your interest in the partnership.

Does anyone know if these K-1 losses affect the QBI deduction? I have a similar rental partnership and heard something about QBI being reduced by losses.