Taking advantage of capital losses on K-1 from real estate investments

Thanks for explaining this! I'm in a similar situation but confused about how these losses actually show up on the K-1. Are they already separated into ordinary vs capital on the form itself? And do I need to do anything special when filing to make sure these losses get applied correctly?

The K-1 form will clearly separate the different types of income and losses. Look for the boxes that specifically report "Net short-term capital gain or loss" and "Net long-term capital gain or loss" - these are your capital losses that can offset capital gains from stocks or other investments. When filing your taxes, these amounts get transferred to Schedule D (Capital Gains and Losses) where they're combined with your other capital transactions. Your tax software should handle this properly, but if doing it manually, make sure you're putting the K-1 capital losses in the appropriate sections of Schedule D. The ordinary losses would generally go on Schedule E.

How does it handle the basis and at-risk limitations? That's where I always get confused with partnership investments. Does it actually help you figure out if you have enough basis to claim the losses?

Sounds interesting but I'm skeptical of how it works with complex K-1s. My real estate partnership K-1 has like 20 different boxes filled out and footnotes everywhere. Can this really interpret all those partnership-specific codes and footnotes that even tax pros struggle with?

It handles basis calculations really well - you upload prior year K-1s and it tracks your basis over time, including increases from additional investments and income, and decreases from distributions and losses. It'll flag when you don't have sufficient basis to claim losses. For complex K-1s with lots of footnotes and supplemental information, that's actually where it shines. You can upload the supplemental pages and it extracts all those details, matching the partnership-specific codes to the right categories. I had a K-1 with 4 pages of footnotes last year and it interpreted everything correctly, even explaining some of those weird passive vs. non-passive activity codes.

Wait, this sounds too good to be true. The IRS phone lines are notoriously impossible to get through. How exactly does this service work? Are they just using some trick to skip the line or something?

I've tried calling the IRS dozens of times about partnership reporting issues and always get "due to high call volume" messages. There's no way a service can actually get you through that easily. And even if you do get through, most IRS phone reps give conflicting advice on complex partnership issues - I'd be very skeptical of any guidance received this way.

It's not a trick - they use technology that continuously redials and navigates the IRS phone tree until it gets through, then connects you immediately once there's an available agent. Think of it like having a robot assistant doing the waiting for you instead of being stuck on hold yourself. You're right that not every IRS rep can handle complex partnership questions. When I got through, I specifically asked for someone in the business tax department. The first person transferred me to a more specialized agent who was very knowledgeable about partnership issues. They confirmed exactly how the capital loss netting rules applied to my specific situation with the K-1 losses. Much better than guessing or getting contradictory info online.

Thanks for bringing up phantom income - that's definitely something the fund managers haven't mentioned yet. Do you know if there's any way to estimate how much phantom income might come up in future years? And what exactly causes it in real estate funds?

Phantom income in real estate funds typically comes from a few sources. The most common is when the fund refinances properties and uses the debt proceeds for something other than distributions. You might not get cash, but your share of the debt reduction is taxable. Another source is when depreciation recapture exceeds the actual economic depreciation of the property. It's hard to estimate future phantom income precisely, but you should ask the fund managers for projections of taxable income vs. cash distributions over the fund's life. Good funds will provide this in their offering materials - it should show years where taxable income exceeds distributions. If they can't or won't provide this kind of projection, that's a red flag. You should also check if they have a tax distribution policy that ensures they distribute at least enough cash to cover the tax liability on phantom income.

This is why I stick to REITs for real estate exposure. Much simpler tax treatment and no surprise K-1s showing up in April. Sure you might get slightly lower returns but the tax simplicity is worth it IMO.

The investment interest expense rules are so confusing. I think those are reported separately on the K-1 in box 13 with code A? Do those actually count as itemized deductions? I never know if I should be taking those since I usually just take the standard deduction.

You're right about box 13 code A - that's where investment interest expense shows up on the K-1. And yes, these are itemized deductions reported on Schedule A. If you're taking the standard deduction, you won't get any benefit from them currently. However, any investment interest expense that exceeds your net investment income gets carried forward indefinitely. So even if you take the standard deduction now, if you itemize in future years, you can use those carried-forward investment interest expenses. Worth tracking even if you can't use them immediately.

This is really helpful information, especially about the Section 199A deduction potential! I hadn't considered that real estate funds might qualify for the QBI deduction. One follow-up question about the basis tracking you mentioned - if the fund takes on additional debt during the investment period, does that automatically increase my basis, or do I need to do something specific to claim that basis increase? And how do I actually track this if the K-1 doesn't clearly show the debt changes from year to year? Also, great point about asking for historical K-1s from their other funds. That seems like something any legitimate fund manager should be willing to provide to help investors understand what they're getting into.

Great question about basis tracking! Yes, increases in partnership debt automatically increase your basis as a partner, but tracking it can be tricky since K-1s don't always show the year-over-year debt changes clearly. Most real estate funds will include supplemental information or footnotes on the K-1 that show your share of partnership liabilities at year-end. You'll want to compare this to the prior year to see the change. Some funds also provide a separate basis calculation worksheet that breaks down all the components - contributions, income, distributions, losses, and debt changes. If your fund doesn't provide clear basis tracking information, you should absolutely request it. This is critical information for determining how much of your losses you can actually claim. I've seen investors miss out on thousands in deductible losses simply because they didn't realize they had sufficient basis from debt increases. For the QBI deduction, it's worth noting that not all real estate activities qualify equally. The fund needs to be conducting an active trade or business (not just passive rental activities) to generate QBI. Ask the fund managers specifically about their QBI qualification and whether they expect to generate qualifying income versus non-qualifying investment income.