D Rich: K-1

K-1

A K-1 investment is not a type of security itself, but rather an investment in a "pass-through" entity that issues a Schedule K-1 tax form. This IRS form reports an investor's share of the entity's income, losses, and deductions, which the investor must then report on their personal tax return. [1, 2, 3]

A K-1 investment can be in various entities, including:

Partnerships A K-1 investment is common in partnerships, where each partner receives a K-1 reflecting their share of the business's profits and losses. This applies to both general and limited partners in a business, including investments like real estate syndications.
S corporations As shareholders in an S corporation, investors receive a K-1 detailing their portion of the company's income, losses, and credits.
Trusts and estates A K-1 is used to report distributions of income, deductions, and credits that flow through to the beneficiaries of a trust or estate.
Private funds Investors in private equity, venture capital, and hedge funds structured as partnerships receive K-1s annually.
Certain exchange-traded funds (ETFs) Some ETFs, particularly those that invest in commodities or are structured as limited partnerships, issue K-1s. [1, 4, 5, 6, 7]

Key characteristics of K-1 investments

Pass-through taxation: K-1 investments are defined by their tax treatment. The investment entity itself does not pay corporate income tax. Instead, the profits and losses are "passed through" to the individual investors, who report them on their own tax returns.
No double taxation: Because the entity does not pay income tax, investors avoid the "double taxation" that occurs with C-corporations, where profits are taxed at both the corporate level and again at the investor level.
Tax complexity: K-1s can be complex tax documents, often arriving late in the tax season and sometimes requiring investors to file for an extension.
Investment reporting: Unlike standard Form 1099s, which are used for interest and dividends, K-1s provide a more detailed breakdown of your share of the entity's financial activity.
Tax advantages: Depending on the investment, K-1 investments can offer tax advantages, such as passing through losses from real estate depreciation to offset other passive income. [1, 6, 8, 9, 10, 11]