K-1 Tax Form Boxes Explained for Real Estate Fund Investors

This is a map of the form, not a tax return. It is for a reader who holds, or is about to hold, a limited partner interest in a real estate or other alternative fund and wants to know what the numbers on the K-1 mean before the accountant asks questions. Which vehicles send a K-1 at all, and which send a 1099, is in our K-1 versus 1099-DIV census; when they arrive is in when K-1s are due for 2026. Neither page explains the boxes.

Three rules that frame every box

The instructions put three ideas in the first pages, and every box below depends on them.

1. You are taxed on your share, not on your cash. In the instructions’ words, “you may be liable for tax on your share of the partnership income, whether or not distributed.”
2. The K-1 does not apply your personal limits. “The amounts shown in boxes 1 through 21 reflect your share of income, loss, deductions, credits, and other items from partnership business or rental activities without reference to limitations on losses” from four sources, which the IRS lists in order: “the basis limitations, the at-risk limitations, the passive activity limitations, and the excess business loss limitations.” A loss on the form is a ceiling, not a deduction.
3. Basis is yours to track. The partnership gives you a capital account analysis in item L, but the IRS says it is “based on the partnership's books and records and can't be used to figure the partner's adjusted basis.” The difference is mostly debt: the instructions explain that adjusted basis “includes the partner's share of partnership liabilities,” which a tax-basis capital account does not.

Box by box: what each one means and where it goes

Source: IRS, Partner's Instructions for Schedule K-1 (Form 1065), 2025 edition (last page dated December 17, 2025), and Instructions for Form 8582. Box wording summarized from the instructions; quoted phrases are verbatim.

The 2025 instructions record one change worth knowing for 2026 paperwork: they say the instructions for Box 19 “were updated to explain how the partnership separately coded” the categories of distribution. If your fund’s K-1 for 2026 shows more than one code in Box 19, that is why.

Why Box 2 is so often a loss: what IRS data show

The IRS publishes the aggregate of every partnership return in its Statistics of Income (SOI) tables. Table 5 sums the income and loss items that are allocated to partners on Schedule K-1, by industry. The figures below are in thousands of dollars as published and are estimates from a sample; the billions are our arithmetic. Table 5 uses all partnerships with income allocated; Table 4 uses only partnerships with net rental real estate income or loss, so partnership counts differ between them.

Source: IRS Statistics of Income, Partnership Table 5 for tax years 2019 to 2023 (IRS Publication 5035 series), all industries and Real estate and rental and leasing, amounts in thousands of dollars; billions are our arithmetic.

The cause shows in Table 4, which looks only at partnerships with rental real estate:

Source: IRS Statistics of Income, Partnership Table 4 for tax years 2019, 2021 and 2023, Real estate and rental and leasing, in thousands of dollars as published; shares and ratios are our arithmetic. The rows for 2020 and 2022 are in the CSV.

Two readings follow, both our arithmetic on the IRS figures. First, rental expenses exceeded gross rents by $24.8 billion in 2023, after $242.6 billion of depreciation and $218.5 billion of interest. A fund that borrows and depreciates will show a loss on Box 2 while it pays distributions out of operating cash, so the form can show a loss in the same year the bank account shows income. Second, the loss is not a tax refund. The partners who can use it are those with enough basis, at-risk amounts and passive income to absorb it, which is the next section.

The SOI also splits income by type of partner. For 2023, individual limited partners were allocated $74.8 billion of the $116.4 billion of income (our arithmetic: 64.2%) of real estate partnerships, while the tax-exempt partners’ allocation was negative $1.0 billion. In the four earlier years that tax-exempt share was between 2.4% and 5.5% of the sector’s total. The SOI category is income allocated, not a count of investors.

What happens to a Box 2 loss: three tests, in order

Source: IRS, Partner's Instructions for Schedule K-1 (Form 1065) (2025), Limitations on Losses and Box 2; Instructions for Form 8582 (special allowance and MAGI phase-out). Step 2 is described in the instructions under at-risk limitations.

The limited-partner test is the one that decides most K-1 fund investors. The Box 2 instructions list eight conditions for taking a loss straight to Schedule E; the last is that the interest “wasn't held as a limited partner.” A limited partner in a syndication or private fund therefore normally cannot use the $25,000 allowance, and a Box 2 loss is held until there is passive income to match or the interest is disposed of. A real estate professional who materially participates is the exception the instructions name for Box 2. Whether you are one is a facts question for your tax preparer.

Box 19 is not income: distributions, basis and gain

Cash in Box 19 lowers your basis. The instructions’ basis worksheet ends with a test: if distributions push the total below zero, “the amount reported on this line represents a taxable gain on distributions in excess of basis.” For Box 19 code A, the IRS says the excess “is treated as gain from the sale or exchange of your partnership interest,” generally capital gain reported on Form 8949 and Schedule D. Code D adds a trap for leveraged funds: a deemed distribution when your share of the fund’s liabilities falls, for example after a refinancing, a property sale that repays debt or a loan paid down. The instructions say code D is used for “a net decrease in your share of partnership liabilities.” That is a distribution of money for basis purposes even though no cash reaches you. See our guide to Form 8949 for REIT, BDC and interval fund sales for the reporting mechanics.

Box 9c is the other number that surprises real estate investors. The IRS says there are “three types” of unrecaptured section 1250 gain, depending on whether it comes from the fund’s asset sale, from your sale of the interest or from an estate, trust, RIC or REIT. Our page on depreciation recapture covers how depreciation previously taken is taxed on a sale.

Box 20: the codes that matter for IRAs, the deduction and the sale

• Code V, unrelated business taxable income. For a tax-exempt partner, the partnership reports the information needed to figure unrelated business taxable income, and the instructions add that the partner “is required to notify the partnership of its tax-exempt status.” If you hold the interest in an IRA, see our self-directed IRA rules page for Form 990-T.
• Code Z, section 199A information. You may be allowed “a deduction of up to 20%” of qualified business income plus qualified REIT dividends. Form 8995, the simplified form, is available if 2025 taxable income before the deduction was $197,300 or less ($394,600 joint).
• Code A, investment income. Goes to Form 4952, Part II, line 4a, for the investment interest limit.
• Code AB, section 751 gain (loss). Used when you sold the interest and part of the gain is taxed at ordinary rates.

A year-end date most K-1 investors miss

If you sell all or part of an interest and part of the price is attributable to “unrealized receivables” or “inventory items,” the instructions require you to notify the partnership in writing “within 30 days of the exchange (or, if earlier, by January 15 of the calendar year following the calendar year in which the exchange occurred).” The notice must give names, addresses and identifying numbers of both parties and the exchange date. There is a penalty for failing to give it, with a reasonable cause exception. The exception for sales of publicly traded partnership interests applies only where a broker files Form 1099-B.

By our arithmetic, a sale closing on November 3, 2026 triggers a notice due December 3, 2026; a sale on December 20, 2026 triggers one due January 15, 2027, a Friday, not January 19. Whether any part of your sale is a section 751(a) exchange depends on the fund’s assets; the sponsor’s tax group or your preparer can say. See also the year-end tax calendar for non-traded REIT and BDC investors and, for the fourth-quarter payment when a K-1 arrives late, estimated tax payments on K-1 income.

What a K-1 holder can do with this

These are questions the form raises, not recommendations for any one return.

• Keep your own basis record every year, starting with the purchase price. The instructions put the burden on the partner, and the fund’s capital account is not a substitute.
• Read Box 2 and Box 19 side by side. A loss next to a distribution means the distribution is lowering basis. Know the running total before an exit, a tender or a refinancing.
• If the fund sends a K-1 after your return is ready, ask the preparer about an extension rather than estimating. If a K-1 is wrong, the instructions say to ask for a corrected one and “Don't change any items on your copy,” and a treatment that differs from the partnership’s needs Form 8082.
• If you plan to sell in 2026, ask the fund for its section 751 information before you sign, and diarize the notice date above.
• If the fund sits in an IRA, check whether the sponsor provides Box 20 code V information.
• For a loss you cannot use now, ask your preparer to keep the Form 8582 carryforward. The suspended amount stays with the interest.

This is analysis of public documents, not investment, legal or tax advice. The person who can say what your K-1 means for your return is a CPA or tax attorney with the return in front of them.

FAQ

Sources, read and saved on October 19, 2026: IRS, Partner's Instructions for Schedule K-1 (Form 1065), 2025 edition (irs.gov/pub/irs-pdf/i1065sk1.pdf; the last page is dated December 17, 2025); IRS, Instructions for Form 8582 (irs.gov/pub/irs-pdf/i8582.pdf); IRS Statistics of Income, Partnership Tables 4 and 5, tax years 2019 to 2023 (irs.gov/pub/irs-soi/19pa04.xlsx through 23pa05.xlsx; published estimates from samples, in thousands of dollars). The 2026 edition of the Partner's Instructions had not been saved when this page was written; box wording may change. This page does not cover Schedule K-1 for Forms 1120-S or 1041, state returns or the partnership audit rules.