Tax Implications of Real Estate Crowdfunding Investments

The tax form depends on what you own. An LLC or limited partnership interest in a deal sends you a Schedule K-1, due by March 15 for a calendar-year partnership or as late as September 15 if it extends; REIT shares send Form 1099-DIV; and a note or loan sends Form 1099-INT, both due by January 31. On a K-1 you are taxed on your share of the deal's income whether or not you receive cash, and depreciation can turn that share into a loss, but the loss is passive, so it generally offsets only other passive income until the deal sells. A property in another state can require a nonresident return there, and a leveraged deal held in an IRA can owe tax on unrelated business taxable income (UBTI).

Which tax form you get, and when it arrives

A debt fund organized as a partnership sends a K-1, not a 1099. An extended K-1 can arrive after your April 15 due date. Form 4868 gives you an automatic six-month extension of time to file, to October 15; it does not extend the time to pay, so estimate what you owe and pay it by April 15.

How depreciation and the passive loss rules affect K-1 investors

The partnership deducts depreciation on its buildings over 27.5 years for residential rental property and 39 years for commercial property. It can also deduct 100% of the cost of qualifying shorter-lived property, such as appliances, carpets, and furniture in apartments, that it acquired and placed in service after January 19, 2025, which can produce a large first-year loss.

Two limits come first: you can deduct a K-1 loss only up to your basis in the deal and the amount you have at risk, roughly your cash in plus your share of the deal's qualifying debt. After that, for a typical crowdfunding investor, the K-1's rental income or loss is passive, meaning it comes from an activity you do not work in. The exception is a real estate professional who materially participates, meaning works in the activity on a regular, continuous, and substantial basis. That matters in three ways:

1. A passive loss offsets only passive income, such as income from another K-1 deal or your own rentals. It cannot offset wages, interest, dividends, or stock gains.
2. The $25,000 allowance that some landlords use does not help. Limited partners cannot qualify as actively participating, and neither can anyone whose interest is worth less than 10% of the activity.
3. Unused losses carry forward. They are freed up in full in the year the partnership sells all of the property in that activity, or you sell your entire interest in a fully taxable sale to an unrelated buyer.

Example. You invest $50,000 in an apartment LLC. Your first K-1 shows $2,000 of cash distributions and a $7,000 rental loss from bonus depreciation. The $2,000 is not taxed when paid; it lowers your basis, your tax cost in the investment, and only cash beyond your basis would be taxed as gain. If another deal's K-1 shows $3,000 of passive income, the loss offsets it and $4,000 carries forward. If you have no other passive income, all $7,000 carries forward. Passive loss rules for real estate investors covers the exceptions, and depreciation on rental property shows how the deduction is calculated.

How REIT dividends and interest are taxed

Form 1099-DIV reports only what the REIT paid you, with no depreciation or losses for you to deduct. Each part is taxed differently:

• Ordinary REIT dividends are taxed at your regular rate, but the part the REIT reports as qualified REIT dividends is eligible for a 20% deduction, capped at 20% of your taxable income (figured before this deduction and minus net capital gain).
• Capital gain distributions (box 2a) are taxed as long-term capital gains no matter how long you have owned the shares.
• Nondividend distributions (box 3) are a return of capital. They are not taxed when paid; they lower your cost basis, and once your basis reaches zero they are taxed as capital gains.

Interest on Form 1099-INT is taxed as ordinary income. For example, $10,000 of qualified REIT dividends at a 24% rate leaves $8,000 taxable after the 20% deduction, for $1,920 of tax, while $10,000 of interest at 24% costs $2,400. At higher incomes, the 3.8% net investment income tax can also apply when your modified adjusted gross income is above $200,000 ($250,000 married filing jointly). Equity vs debt crowdfunding compares the two kinds of investment beyond taxes.

When out-of-state properties trigger state returns

A partnership passes through income from each property it owns, so the state where a property sits can tax your share even if you live elsewhere. California, for example, taxes nonresidents on California-source income, which includes rent from California real property and gain from selling it. A nonresident with California-source income must file Form 540NR when worldwide gross income or California adjusted gross income exceeds the state's thresholds. For 2025, those are $22,941 of gross income or $18,353 of adjusted gross income for a single filer under 65 with no dependents, so a small K-1 from a California deal can require a California return.

California also lets a partnership file one group nonresident return for investors who qualify and elect in, which replaces your own California return. The cost is that the group return taxes the income at California's top 12.3% rate with no personal deductions or credits, so filing your own return can cost less. Before you invest, ask the sponsor which states the deal will file in and whether it files group returns there. If your home state also taxes that income, check whether it gives a credit for tax paid to the other state.

What you owe when the deal sells or you cash out

When a K-1 deal sells its property, your final K-1 reports your share of the gain. The part that comes from depreciation on the building, called unrecaptured section 1250 gain and shown in box 9c, is taxed at your ordinary rate up to 25%. Gain from depreciation on appliances, carpets, furniture, and other personal property, including the 100% first-year deduction, is recaptured as ordinary income with no 25% cap. The rest of a long-term gain is taxed at 0%, 15%, or 20%. If the sale disposes of the whole activity, as when a single-property deal sells its only building, your suspended passive losses from the deal become deductible against any income that year. A fund that sells one of several properties does not free them all.

Example. Your K-1 shows a $30,000 long-term gain, $10,000 of it unrecaptured section 1250 gain, and you are in the 24% bracket with a 15% capital gain rate. Federal tax is $10,000 x 24% = $2,400 plus $20,000 x 15% = $3,000, or $5,400 before any net investment income tax. If the deal was a single property and you carried $7,000 of suspended losses from the deal, deducting them that year saves $7,000 x 24% = $1,680.

When you sell or redeem REIT shares, your gain or loss is the price minus your basis after return-of-capital reductions. Gains on LLC interests cannot be deferred with a 1031 exchange; whether crowdfunding interests qualify for a 1031 exchange explains the DST and TIC exceptions.

Holding crowdfunding investments in an IRA: the UBTI issue

An IRA, including a Roth IRA, is tax-exempt except on unrelated business taxable income, which it pays tax on like a trust. Rent from real property is normally excluded from UBTI, but income from property bought with borrowed money is not: the share that counts generally follows the property's debt divided by its adjusted basis. If your IRA owns part of a leveraged LLC deal, its share of that debt-financed income is UBTI, and the K-1 reports it once the IRA tells the partnership it is tax-exempt.

When the IRA's gross income from unrelated businesses is $1,000 or more, the IRA itself must file Form 990-T by the 15th day of the 4th month after its tax year ends and pay tax from the account at trust rates, after a $1,000 deduction. For example, if a deal financed 60% of its property with debt and your IRA's share of net rental income is $3,000, about $1,800 is debt-financed income.

Dividends and interest are excluded from UBTI unless the IRA borrowed to buy the investment, so REIT shares and notes held in an IRA generally avoid the issue. Self-directed IRA real estate investing covers custodians, prohibited transactions, and the rest of the IRA rules.

For how crowdfunding deals are structured in the first place, see what real estate crowdfunding is.