How should I report my activity as a real estate investor on my tax return?

How should I report my activity as a real estate investor on my tax return?

by Susan E. S. Howe, CPA | Feb 07, 2018

I invested $16,000 with a real estate company. I received $25,000 back, and then I invested another $10,000, all in 2017. How do I file this activity?

We assume you are asking about the individual tax consequences for you as an investor. How this activity is reported depends on the form of the real estate company and how your investment was made. Frequently, real estate activities are organized as partnerships or S corporations. If this is your situation, the $26,000  you invested is considered a contribution of capital, and you will receive a Schedule K-1 reporting your share of the partnership's activity. The $25,000 you received would be considered a distribution from the partnership, and it is nontaxable to the extent you have "basis" in the partnership interest. Basis is obtained by the amount contributed to the partnership and any income that is reported by you from a Schedule K-1. Losses flowing through from the partnership decrease basis.

Using the amounts above, and assuming you receive a K-1 reporting $10,000 income, you would have the following tax consequences:

  • The income of $10,000 is reported on your 1040 from the Schedule K-1.
  • Your basis in the partnership interest is $16,000, plus $10,000 income, plus the additional $10,000 you invested, so the $25,000 you received back is tax free, and you have $16,000 plus $10,000 less $25,000 plus $10,000 = $11,000 in basis as of the end of the year. There is nothing to report relative to the $25,000 return of capital since you have basis in excess of this amount.

If the real estate activity is not organized as a partnership and you received stock for your initial investment of $16,000, then the $25,000 you received likely is either a dividend (for which you would receive a Form 1099 from the company) or a sale of stock. If the $25,000 was for a sale of stock, then you likely have a $9,000 short-term capital gain ($25,000 in proceeds less $16,000 basis), and will be fully taxed on your return.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Susan E. S. Howe, CPA, is principal of Howe Advisory in Strafford, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
Financial FAQs

Search the most frequently asked finance and accounting questions and read the responses from PICPA members. Always consult a CPA before taking action.