What Is a K-1 Tax Form? The Three Types and How They Hit Your Return

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

A K-1 (Schedule K-1) is the IRS form that reports your share of the income, gains, losses, deductions and credits from a partnership or an S corporation, or the share of a trust’s or estate’s income that is passed out to you as a beneficiary. Partnerships and S corporations generally pay no federal income tax themselves; a trust or estate pays tax only on the income it keeps. The entity files its own return, then sends each owner or beneficiary a K-1 showing what to report on their personal Form 1040. For a partnership or S corporation, you owe tax on your share whether or not any cash was actually paid out to you.

For a W-2 household in California or Washington, K-1s rarely come from a job. They come from what you invest in once your salary and RSUs outgrow the 401(k) and the brokerage account: private real estate funds, venture or private equity funds, oil and gas or other publicly traded partnerships, a physician group you bought into, or a trust set up for your children. Each one adds a form that can arrive months after your W-2s, and each one can change your tax bill in ways the cash you received does not show.

The three kinds of K-1 and who sends them

There is no single “K-1 form.” There are three, each attached to a different entity return.

The partnership rule comes from the Form 1065 instructions: a K-1 must be given to each partner by the day the partnership return is due, which is March 15 for a calendar-year partnership, and a Form 7004 extension pushes that date back by six months. The S corporation and trust dates follow the Form 1120-S instructions and Form 1041 instructions; the extension is six months for an S corporation and five and a half months for a trust or estate (Form 7004 instructions). K-1s are not due by January 31 like a W-2 or 1099. More detail on timing is in when you should receive your K-1.

What a K-1 actually tells you

A K-1 is a list of boxes, each a different type of income or deduction, because each type is taxed differently on your return. The ones that matter most for our families, using a partnership K-1 as the example:

• Ordinary business income or loss. Your share of the entity’s operating profit. For a passive investor this is passive income or loss.
• Rental real estate income or loss. Private real estate funds often show a loss here in early years because of depreciation, even when they pay you cash.
• Interest, dividends and capital gains. Taxed as if you had earned them directly, at the same rates as in your brokerage account.
• Distributions. The cash you received. This is usually not the taxable number. It generally reduces your tax basis in the investment instead.
• Capital account and footnotes. Your running investment balance and notes on state-source income, foreign items and anything unusual. Your preparer needs these.

The key idea: taxable income and cash are separate. A fund can report $12,000 of income to you and distribute nothing (sometimes called phantom income), or send you $10,000 in cash and report a loss. Where each box lands on the 1040 is covered in where K-1 income goes on your 1040.

Worked example: a $900,000 California household with two private funds

Assumptions (illustrative): married filing jointly, $900,000 of W-2 and RSU income in 2026, living in San Jose, taxable income around $850,000 for both federal and California purposes. They hold $200,000 in a private real estate fund and $100,000 in a venture fund. Both are passive investments.

Their K-1s for the year show:

• Real estate fund: $18,000 rental loss (mostly depreciation), $10,000 cash distribution.
• Venture fund: $6,000 long-term capital gain, $1,500 interest, no cash distribution.

How it plays out:

1. The $18,000 loss does not reduce their wages. Rental real estate losses are passive. The special $25,000 allowance for rental losses phases out between $100,000 and $150,000 of modified AGI, so at their income it is gone, and a limited partner in a fund generally is not treated as actively participating anyway (IRS Publication 925). The loss is suspended and carried forward. It can offset future passive income, or be released when they fully sell out of the fund.
2. The $10,000 distribution is not taxed as income this year. It lowers their basis in the fund.
3. The $1,500 of interest is taxed federally at 37% (their taxable income is above the $768,700 start of the 2026 MFJ 37% bracket, per Rev. Proc. 2025-32) plus the 3.8% Net Investment Income Tax, which applies above $250,000 of MAGI for joint filers. That is about $612 federal.
4. The $6,000 long-term gain is taxed at 20% (the 2026 MFJ 20% rate starts above $613,700 of taxable income) plus 3.8%, about $1,428 federal.
5. California taxes both at ordinary rates. California has no lower rate for capital gains. At their income the marginal rate is 10.3% (2025 MFJ bracket of $742,958 to $891,542; the 2026 schedule was not yet published), so roughly $155 on the interest and $618 on the gain.

Net result: about $2,813 of added tax on $7,500 of reported income, while the largest number on the forms, the $18,000 loss, gives no benefit this year. The family received $10,000 in cash and still owes tax. None of this is wrong, but it surprises people who judge a private investment by its distributions.

The same family in Washington

The federal math is identical. Washington has no individual income tax in 2026, so the interest adds nothing at the state level. Washington’s separate capital gains tax (7%, and 9.9% on taxable gains above $1,000,000) applies only to long-term gains above a standard deduction of $278,000 (2025 figure, per WA DOR), so a $6,000 fund gain would not trigger it. Two cautions for high earners: Washington has enacted a 9.9% tax on AGI over $1,000,000 starting January 1, 2028, and large fund exits in a single year can push a family past the capital gains threshold.

Why K-1s change how you file

K-1s are a common reason a high-income W-2 family ends up extending its return. If a fund extends, your K-1 may not arrive until late summer. You can extend your own Form 1040 to October 15 with Form 4868, but an extension gives more time to file, not to pay. Your preparer should estimate the K-1 income and include it in the April payment.

Other things K-1s bring that a W-2 never does:

• Other state returns. A fund that owns property or operates in other states can create a filing requirement there. Many funds file composite returns on your behalf, but check the footnotes.
• Amended K-1s. Funds sometimes issue corrected K-1s after you have filed, which can mean an amended return.
• K-1s inside an IRA. Some partnership income held in an IRA can create unrelated business taxable income that the IRA itself must report. It is one reason many families keep partnership investments out of retirement accounts.
• Preparation cost. Each K-1 adds preparer time. Ten small fund positions can cost more to report than they earn in a year.

Are K-1 investments worth it for your family?

People search for the “advantages of K-1” investments. The honest answer is that the K-1 is a reporting form, not a benefit. The tax features that come with it, such as depreciation in real estate funds, can help, but for a family earning $750,000 to $3 million most of those losses sit suspended because they are passive. In California, gains get no rate break at the state level. The decision to make is whether the investment’s return, after fees, taxes and the cost of later filing, beats what a plain taxable brokerage account would earn. Compare it with how K-1 and 1099 income are taxed and with the rules on K-1 tax rates for new investors.

A simple check before you sign a subscription agreement:

• When has this fund delivered final K-1s in each of the last three years?
• Does it expect to report losses early and gains later, and do we have passive income those losses can use?
• Which states will it create filing obligations in?
• How long is the money locked up, and what happens to the K-1s if one of us dies?

Common K-1 mistakes we see

• Filing in April with an estimate and no plan to amend when the real K-1 arrives.
• Treating distributions as income, or assuming no cash means no tax.
• Losing track of suspended passive losses when changing preparers. They are only useful if someone carries them forward.
• Assuming a trust for the kids “handles its own taxes.” A trust that distributes income sends K-1s to the beneficiaries, which can bring the kiddie tax into play for children under 18 (and in some cases up to age 23).

What to write down for your family

Private investments are the part of a family’s finances a surviving spouse or a guardian is least able to reconstruct. Every K-1 source keeps sending forms, capital calls and tax notices for years. Keep one page that lists each entity, how much was committed and called, the investor portal and contact, the usual K-1 arrival month, and any suspended losses. Add a sentence on why you invested, so your children later understand the thinking and not just the paperwork. Conversations fade. Documentation compounds.

K-1 questions families ask

Is K-1 income earned income?

Usually not for a passive investor. Your share of a fund’s income is investment or passive income, so it does not count as earned income for retirement contributions or a custodial Roth IRA. General partners and active owners can have self-employment income, which is different. See whether K-1 income counts as earned income.

What if my K-1 has not arrived by April 15?

File Form 4868 to extend to October 15 and pay an estimate of the tax, including the expected K-1 income, by April 15. Filing on a guess and amending later is possible but usually costs more in preparer time. If the fund extends every year, plan for an October filing from the start.

This is general education, and the right move depends on your family’s full picture. If you hold several K-1 investments and want them reviewed alongside your RSUs and state tax exposure, our tax management work at Age Five Family Office™ starts with a Tax & Wealth Assessment.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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