K1 delay and taxes

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
deanmoriarty
Posts: 177
Joined: Tue Jan 28, 2014 1:19 am

K1 delay and taxes

Post by deanmoriarty » Thu Sep 06, 2018 10:52 pm

Hello

A couple years ago, I made an illiquid investment in a crowdfunded real estate partnership. I invested a very small amount ($4000) compared to my net worth ($1.5M, all in Vanguard).

Being illiquid, I am not able to get out of it, I’ve been emailing them but it’s obviously not possible. This is not a problem per se as the returns have been in the expected range so far, it has been distributing 12% annualized a year, ACHing me 40$ every month ever since.

The problem is that from a taxation point of view they need to emit a K1 every year, and they are incredibly slow, always risking of falling after the April 15th deadline, which would cause me to file an extension, and that bothers me.

Is there something I can do? What if I simply treat the payments received as interest income and as such I apply my marginal rate on them when paying taxes? Would that allow me to file taxes even before receiving the K1 without having to amend later, or ask for an extension? Or is that highly illegal?

Thanks

LovingLife
Posts: 36
Joined: Mon Apr 23, 2018 10:31 pm

Re: K1 delay and taxes

Post by LovingLife » Thu Sep 06, 2018 11:21 pm

Does your agreement with this partnership call for them to send you a K1 prior to 4/15 each year? If not, they are not obligated to do so, and are only required to do so before 9/15 each year. That said, if this is your only K1, I could see how you might find the timing annoying.

I have over a dozen K1s from investments and almost none provide a final K1 before 4/15. A few provide an estimated K1, and the rest provide nothing by 4/15. I file for an extension every year and pay any estimated taxes by 4/15. Then when all the final K1s arrive, I do my final taxes and send it off before 9/15 with either an additional check or request for refund or rollover to the following tax year.

Re: whether you can file your taxes by 4/15 without this K1 in hand and not have to amend later depends on whether your assumptions line up with what’s in the final K1. I presume the IRS would want to see the final K1 but I don’t know the definitive answer to that one.

deanmoriarty
Posts: 177
Joined: Tue Jan 28, 2014 1:19 am

Re: K1 delay and taxes

Post by deanmoriarty » Fri Sep 07, 2018 8:40 am

LovingLife wrote:
Thu Sep 06, 2018 11:21 pm
Does your agreement with this partnership call for them to send you a K1 prior to 4/15 each year? If not, they are not obligated to do so, and are only required to do so before 9/15 each year. That said, if this is your only K1, I could see how you might find the timing annoying.

I have over a dozen K1s from investments and almost none provide a final K1 before 4/15. A few provide an estimated K1, and the rest provide nothing by 4/15. I file for an extension every year and pay any estimated taxes by 4/15. Then when all the final K1s arrive, I do my final taxes and send it off before 9/15 with either an additional check or request for refund or rollover to the following tax year.

Re: whether you can file your taxes by 4/15 without this K1 in hand and not have to amend later depends on whether your assumptions line up with what’s in the final K1. I presume the IRS would want to see the final K1 but I don’t know the definitive answer to that one.
Thanks for sharing your experience. I definitely became wiser after this small mistake and I’m never going to do a new investment involving a K1 unless it will somehow become a “substantial” opportunity, the headache at tax time is so not worth it.

jebmke
Posts: 8411
Joined: Thu Apr 05, 2007 2:44 pm

Re: K1 delay and taxes

Post by jebmke » Fri Sep 07, 2018 8:44 am

I haven't filed in April in decades. One year I even filed in January of the following year. It is no more or less work to complete a preliminary return, file and extension and the make a final filing in September/early October. The IRS doesn't really care one way or the other. That reminds me, I need to dig up my preliminary return some time this month and finish it.
When you discover that you are riding a dead horse, the best strategy is to dismount.

senex
Posts: 72
Joined: Wed Dec 13, 2017 4:38 pm

Re: K1 delay and taxes

Post by senex » Fri Sep 07, 2018 8:56 am

Agree with prior responses. K1s rarely arrive before Apr 15 and extensions are free/easy, so the standard recommendation is to extend. Everyone I know who gets K1s does so.

Your workaround idea may cause IRS follow-up letters saying that you failed to report the K1 income and asking you to correct it. Replying to such letters is a bigger hassle than extending.

Don't give up on selling the shares. Try calling the company (not emailing). You can offer your shares for sale to current investors (if you can find a list of current investors). If you offer a decent discount a current shareholder might buy you out. Or I wonder if there a secondary market for this stuff, sort of like a craigslist for partnership interests?

User avatar
unclescrooge
Posts: 2598
Joined: Thu Jun 07, 2012 7:00 pm

Re: K1 delay and taxes

Post by unclescrooge » Fri Sep 07, 2018 10:25 am

deanmoriarty wrote:
Thu Sep 06, 2018 10:52 pm
Hello

A couple years ago, I made an illiquid investment in a crowdfunded real estate partnership. I invested a very small amount ($4000) compared to my net worth ($1.5M, all in Vanguard).

Being illiquid, I am not able to get out of it, I’ve been emailing them but it’s obviously not possible. This is not a problem per se as the returns have been in the expected range so far, it has been distributing 12% annualized a year, ACHing me 40$ every month ever since.

The problem is that from a taxation point of view they need to emit a K1 every year, and they are incredibly slow, always risking of falling after the April 15th deadline, which would cause me to file an extension, and that bothers me.

Is there something I can do? What if I simply treat the payments received as interest income and as such I apply my marginal rate on them when paying taxes? Would that allow me to file taxes even before receiving the K1 without having to amend later, or ask for an extension? Or is that highly illegal?

Thanks
So you have an investment that generates 12% return and can't find any buyers ? :shock:

Agent007
Posts: 17
Joined: Sun Oct 01, 2017 3:42 am

Re: K1 delay and taxes

Post by Agent007 » Fri Sep 07, 2018 10:32 am

I was pretty much in your same boat 20 years ago with a family K1 and yes, it bothered me. Looking back, I realize that it was foolish to put any angst or time into worrying about this. I've filed extensions for the past umpteen years. The government doesn't care as long as they get 95% of the taxes that they're owed. Extensions are just part of getting older and getting a more complicated tax situation.

jebmke
Posts: 8411
Joined: Thu Apr 05, 2007 2:44 pm

Re: K1 delay and taxes

Post by jebmke » Fri Sep 07, 2018 10:38 am

Agent007 wrote:
Fri Sep 07, 2018 10:32 am
Extensions are just part of getting older and getting a more complicated tax situation.
The trick is to remember that April 15 isn't a real filing deadline, it is a payment deadline. The filing deadline is October 15. Any payment in April is more like another estimated tax payment.

In fact, if they owe you money, the October 15 deadline is technically there but rarely enforced. I have filed many returns for TaxAide clients who were owed refunds well after October 15. None of them had gotten even a letter from the IRS about not having filed and none of them had filed for an extension. I don't advise following this approach (it isn't technically legal) but if you are paid up, the IRS really has other fish to fry.
When you discover that you are riding a dead horse, the best strategy is to dismount.

riverguy
Posts: 439
Joined: Sun May 23, 2010 10:33 pm

Re: K1 delay and taxes

Post by riverguy » Fri Sep 07, 2018 5:59 pm

deanmoriarty wrote:
Thu Sep 06, 2018 10:52 pm
Hello

A couple years ago, I made an illiquid investment in a crowdfunded real estate partnership. I invested a very small amount ($4000) compared to my net worth ($1.5M, all in Vanguard).

Being illiquid, I am not able to get out of it, I’ve been emailing them but it’s obviously not possible. This is not a problem per se as the returns have been in the expected range so far, it has been distributing 12% annualized a year, ACHing me 40$ every month ever since.

The problem is that from a taxation point of view they need to emit a K1 every year, and they are incredibly slow, always risking of falling after the April 15th deadline, which would cause me to file an extension, and that bothers me.

Is there something I can do? What if I simply treat the payments received as interest income and as such I apply my marginal rate on them when paying taxes? Would that allow me to file taxes even before receiving the K1 without having to amend later, or ask for an extension? Or is that highly illegal?

Thanks
If you want to sell, PM me info and maybe we can work a deal.

SoAnyway
Posts: 196
Joined: Tue Jul 31, 2018 11:49 pm

Re: K1 delay and taxes

Post by SoAnyway » Fri Sep 07, 2018 6:48 pm

I agree with the prior posts that K-1 delays/going on extension are par for the course. If you do want to sell, OP, first check the partnership agreement. It's not unusual for there to be provisions requiring you first to offer your interest to the company and the other investors, and spelling out the process. Look for phrases like "buy-sell", "right of first refusal", "co-sale agreement".

User avatar
celia
Posts: 8475
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: K1 delay and taxes

Post by celia » Fri Sep 07, 2018 7:25 pm

I was doing taxes for a relative each year until he bought some shares in multiple partnerships in his brokerage account. I wasn't confident in preparing his taxes anymore since there were about 10 boxes on the K-1 with numbers. Not much of it was interest. It was mainly gains, losses, taxes paid and things I didn't understand and there was some return of principal (purchase cost of the shares).

He started paying a tax preparer $300 a year. When I pointed out his new expense, he said that was fine since the partnerships bring in more than that each year. But I told him a lot of it is return of his principal. He finally sold the last one this year, so it will be interesting to see what kind of gain he has. (Even if he sold for the same amount it cost to get in, the return of principal means he has a smaller cost basis now.)

I believe many K-1s arrive after April 15 because the partnership has to wait for the companies they invest in to send the partnership the partnership's tax forms so they can calculate how much to pass on to each investor.

Greenman72
Posts: 144
Joined: Fri Nov 01, 2013 2:17 pm

Re: K1 delay and taxes

Post by Greenman72 » Sat Sep 08, 2018 10:48 am

I'm a CPA, and I only deal with this problem about a hundred times a year.

Here is a comprehensive list of solutions:
1. Sell the investment.
2. File before April 15.
3. Get an extension.

If you file before you get a K-1, you'll have either overstated or understated your income. If you overstated it, you've paid too much tax, and you'll have to file an amended return to get it refunded. And (for me) an amended return will cost you about 3x what a regular return will cost you (plus the cost of the original return). Alternatively, you could just let the government keep the money.

If you understated it, then....you'll have to file an amended return. Or let the government calculate it and send you a bill. With penalties and interest.

Oh--by the way--I charge $50-100 to figure out the K-1, depending on how complex it is. So your investment better be paying you a lot more than that.

deanmoriarty
Posts: 177
Joined: Tue Jan 28, 2014 1:19 am

Re: K1 delay and taxes

Post by deanmoriarty » Sat Sep 08, 2018 11:31 am

Greenman72 wrote:
Sat Sep 08, 2018 10:48 am
I'm a CPA, and I only deal with this problem about a hundred times a year.

Here is a comprehensive list of solutions:
1. Sell the investment.
2. File before April 15.
3. Get an extension.

If you file before you get a K-1, you'll have either overstated or understated your income. If you overstated it, you've paid too much tax, and you'll have to file an amended return to get it refunded. And (for me) an amended return will cost you about 3x what a regular return will cost you (plus the cost of the original return). Alternatively, you could just let the government keep the money.

If you understated it, then....you'll have to file an amended return. Or let the government calculate it and send you a bill. With penalties and interest.

Oh--by the way--I charge $50-100 to figure out the K-1, depending on how complex it is. So your investment better be paying you a lot more than that.
This is interesting. Assuming I’m able to overstate it (treating the distribution as a 1099INT so applying the maximum possible taxation to it) and ok with letting the government/state keep the money, are you saying that I am not under legal obligation to disclose the K1 to the irs ever, as long as I pay enough?

Greenman72
Posts: 144
Joined: Fri Nov 01, 2013 2:17 pm

Re: K1 delay and taxes

Post by Greenman72 » Sat Sep 08, 2018 9:13 pm

Sure. As long as you report at least what’s on the K1 and characterize it appropriately, the IRS won’t care. They’re happy to keep your money.

So let’s assume you reported 100k of net rental income and 1k of interest, but the K1 shows a 100k loss and $500 in interest. You’ve overstated your ordinary income by $200,500, which translates to overpaying your taxes by $50k, 60k, maybe even 80k. And if you’re okay with that, the IRS will gladly hold onto it for you.

On a different vein—why is OP so dead set against an extension?

deanmoriarty
Posts: 177
Joined: Tue Jan 28, 2014 1:19 am

Re: K1 delay and taxes

Post by deanmoriarty » Tue Sep 11, 2018 10:41 pm

Greenman72 wrote:
Sat Sep 08, 2018 9:13 pm
Sure. As long as you report at least what’s on the K1 and characterize it appropriately, the IRS won’t care. They’re happy to keep your money.

So let’s assume you reported 100k of net rental income and 1k of interest, but the K1 shows a 100k loss and $500 in interest. You’ve overstated your ordinary income by $200,500, which translates to overpaying your taxes by $50k, 60k, maybe even 80k. And if you’re okay with that, the IRS will gladly hold onto it for you.

On a different vein—why is OP so dead set against an extension?
I'll tell you my reason for wanting to file as early as possible: in a previous year I had to pay a lot of AMT for deferral items (incentive stock options exercise), so that created a pretty good amount of AMT credits that I'm carrying forward: with the new tax plan and the new relaxed AMT exemptions and exemption phaseout thresholds, I expect to be able to redeem those AMT credits against my regular taxes at the tune of ~$30,000 a year for the next few years.

Since I'm already minimizing my W2 withholding, filing early is the only method I have to get that refund as soon as possible: so, filing in late January vs October and getting the refund 8 months earlier has a real opportunity that I'm losing because of these K1 delays.

I hope that's clear.

Greenman72
Posts: 144
Joined: Fri Nov 01, 2013 2:17 pm

Re: K1 delay and taxes

Post by Greenman72 » Fri Sep 14, 2018 11:21 am

Okay, so a $30k credit received half a year early, at 8% annual return equals......30,000 x .5 x .08 = $1,200.

Might as well wait. Because if I'm filing your return, and I have to file a return in April, knowing full well that I'm going to amend your return later, you'll probably pay me $1,200 just to put up with you. But that's just me.

And you can plan on reducing your $1,200 dollar-for-dollar for every dollar that you overpaid on your taxes, if you choose not to amend your return.

Post Reply