Disclaimer
We only endorse products that we truly believe in. Some of the links below may earn us some extra guac at no additional cost to you. Please pass the chips & thank you for feeding our habit.
The Minority Mindset earns commission from Fundrise via the partner links below. All opinions are the author's.
Real estate crowdfunding is a relatively new and exciting way to invest in real estate. Through platforms like Fundrise and Realty Mogul, regular people can participate in major real estate deals ranging from single-unit rentals to operating entire apartment complexes. And what’s even better is that they can do this starting with as little as $10.
However, one of the major details that are not as well known to participants is what kind of tax documentation they’ll be required to get from these crowdfunding platforms for their federal tax returns.
Unlike stocks and mutual funds, the rules for real estate can get a little more complicated – especially for investors who enter into private agreements. Although it may seem initially like there’s some uncertainty, this can basically be broken down into two major groups.
The IRS requires real estate crowdfunding platforms to provide a few fundamental documents for filing taxes. These include 1099s for general-purpose funds like REITs and Schedule K-1s for more exclusive projects and sponsorships.
Thankfully, the core information contained in these documents is not that much different than what an investor might find on the tax forms from a brokerage. In this post, we’ll explain these real estate tax documents in more detail, who needs them, and how crowdfunded real estate can even be beneficial from a tax perspective.
Tax Documents For Real Estate Crowdfunding
When it comes to reporting taxes to the IRS, participants of real estate crowding will fall into one of two types of categories: accredited and non-accredited.
The U.S. SEC defines an accredited investor as someone who has either:
- An annual income over the last 2 years of at least $200,000 per year for single filers ($300,00 for joint filers) and reasonably expects the same income in the current year.
- A net worth of over $1 million not including the value of their primary residence.
Generally speaking, accredited investors will have greater access to exclusive projects and investment opportunities. These may be high-minimum funds or even the possibility to invest directly in specific real estate projects. In turn, those projects will require more specialized tax documents.
Non-accredited investors will be offered more standardized types of investments such as shares of private REITs (real estate investment trusts). Private REITs can be similar to publicly-traded REITs with the major exception that they are not sold in the open public market. The tax documentation for these types of investment products will be more straightforward.
Now that we know the difference between who can invest and what types of products they’ll be offered, let’s review the specific tax documents that each can expect to receive.
1099 Tax Documents
Most everyday investors with less than about $10,000 of capital to contribute will be placed into one of the real estate crowdfunding platforms REITs.
For example, members of Fundrise who invest less than $5,000 will be automatically placed into their core Flagship Real Estate Fund, an eREIT that invests in dozens of projects across the platform as well as some debt-related securities. Only after investors have a balance greater than $5,000 will they have the opportunity to contribute to other specialized eREITs.
Just like any other brokerage offering stocks and publicly-traded REITs, crowdfunding participants who invest in REITs should expect to receive a tax form 1099 package. This may contain separate 1099s for each type of REIT they hold or a consolidated 1099 (depending on the platform).
Generally speaking, a 1099 package will contain the following sections:
- 1099-B – Reports any brokerage-related activities such as capital gains and losses.
- 1099-INT – Reports any interest that was paid out by the REIT. Interest may be earned on debt-type securities (such as mortgages).
- 1099-DIV – Reports any dividends that were paid out by the REIT. To qualify as a REIT, the company must distribute at least 90 percent of its earnings to the shareholders. Therefore, they’re known for paying higher than average dividends to their shareholders.
A note about REITs and dividends: If you’re already familiar with the fact that most dividends from stocks count as qualified dividends, then I have some unfortunate news about REITs.
By design, REITs can avoid corporate taxes if they meet the 90 percent distribution of earnings requirement. Since they will not pay any corporate taxes, the IRS does not allow the distributions to be counted as “qualified”, and they will instead be taxed at ordinary income rates. This is true even for REITs offered by real estate crowdfunding platforms.
However, from now until Dec. 31, 2025, taxpayers may also generally deduct 20 percent of the combined qualified business income, which includes Qualified REIT Dividends. Without getting into too much detail, this means that a portion of the dividends may appear on your 1099 as qualified.
Schedule K-1 Tax Documents
When someone takes part in a more exclusive real estate fund or project, generally (but not always) an accredited investor, they can expect to receive what’s known as a Schedule K-1. This is a special type of document which summarizes and reports each partner’s share of the partnership. This information then gets reported on tax Form 1065.
Background: Most real estate companies (also called sponsorships) are created as LLCs (limited liability corporations) with partnerships. There can be general partners (those who make decisions about the business) and those who are classified as limited partners (those who benefit financially but have no say in the day-to-day operations).
When an investor contributes to one of these sponsorships, they are essentially becoming a limited partner of the sponsorship LLC. Or, more specifically, they are contributing to a crowdfunding platform (which is also an LLC) that contributes on their behalf to the sponsorship LLC.
Because of this tax structure, the profits and losses flow down the chain from the sponsorship LLC through the platform to the investor. This leaves the investor with the responsibility of paying federal taxes on their share of the business activities.
Similar to a 1099, a Schedule K-1 will report each partner's share of the partnership's earnings, losses, deductions, and credits. Depending on the platform being used and investments they’ve made, the investor may receive one K-1 for each property or one consolidated document.
Where To Find Your Tax Documents
Just like most online brokerages, your tax documents will be made available through the account dashboard. For instance, Fundrise has a “Documents” menu option where the account owner’s 1099 tax package as well as regular account statements can be downloaded.
Unfortunately, Fundrise does not make Schedule K-1s available for download. Users of other platforms will want to check the FAQ Resource to see if they also only send these forms by mail.
If you work with a popular tax preparation software like TurboTax, then you're in luck. Fundrise is already integrated with TurboTax and your 1099 tax package can automatically be imported after entering your Fundrise account number, email address, and password. Schedule K-1s, however, will need to be manually input.
Schedule K-1 Delays and Tax Filing Extensions
In the world of private real estate investing, getting a Schedule K-1 on time can be challenging. The deadline to prepare this form is March 15th, which in theory leaves one month until the typical April 15th tax filing deadline. However, Schedule K-1s often get delayed due to several reasons:
- Property managers have 20 days from the end of the year to submit financials to the sponsorship. The collection of this information can take several weeks to perform.
- CPAs then need time to review this information and prepare Form 1065. Depending on their queue of clients, this may take some additional weeks.
- The 2017 Tax Cuts and Jobs Act contains some ambiguity about business interest limits. CPAs may need to seek clarification from other professionals, and this can add more time to the overall process.
Since this is such a common occurrence, the IRS often grants tax-filing extensions to individuals awaiting their Schedule K-1s. If you find yourself in this situation, you can file for a 5-month extension by filing Form 7004.
What Are The Tax Benefits Of Real Estate Crowdfunding?
While the complexity of these tax documents can seem like a nuisance, it’s important to remember: These rules would apply regardless if you used a real estate crowdfunding platform or not. For example, if you were to buy an investment property on your own or with a group of other investors, you’d still have to prepare a Schedule K-1, so essentially it’s the same.
On top of having the opportunity to simply participate in real estate deals of this magnitude, there can even be some preferential tax reasons to use a crowdfunding platform. Here’s how:
- Distributions from capital gains are typically taxed at a long-term capital gains rate. Sometimes the distributions investors will receive will be the result of the REIT or partnership selling a property and making a profit. Because most properties are held for longer than one year, most distributions will qualify as a long-term capital gain.
- Activity is taxed as “passive” meaning there are no self-employment taxes to be paid. This means that if there are any losses, they can be used to offset other eligible passive gains. That could be especially helpful if you earn a gain from other partnerships or have other private real estate gains such as those from rental properties.
- Rather than receiving individual Schedule K-1s from each sponsor, the crowdfunding platform will often consolidate them into one aggregate document. Realty Mogul provides this service to their members and even mentions that their CPAs catch and reconcile errors before turning them over to the investors. They will also remind sponsorships to start preparing these documents as soon as possible to help mitigate any delays.
- Many of the platforms allow participants to set up their accounts as a traditional or Roth IRA. This would give them the benefit of either deferring taxes until retirement or growing their contributions tax-free. Fundrise will let members roll capital into IRAs from previous 401ks, other employer-sponsored plans, and other IRAs.
Understanding How Real Estate Crowdfunding Affects Your Taxes
While crowdfunding is a relatively new and exciting way to invest in real estate, it does raise a lot of important questions about taxes. This can be especially true for more exclusive deals where the investors will contribute to the project directly.
For the majority of these investments, the deciding factor will depend on whether you're considered to be an accredited or non-accredited investor as defined by the SEC.
Non-accredited investors will typically be placed in REIT funds and receive a 1099 package. This will include information about capital gains, losses, dividends, and any interest earned. Participants can expect to receive a 1099 for each REIT they own through the platform.
Accredited investors will most likely be able to contribute directly to specific projects. When they do this, they will essentially become business partners with the project sponsor and will therefore need to file a Schedule K-1. This is another type of tax document which details the capital gains, losses, and distributions earned through the partnership.
Oftentimes due to their complexity, these Schedule K-1s may get delayed and not be available in time for the April 15th tax date. This is fairly common, and the IRS will allow a 5-month extension for people in the situation by filing Form 7004.
While these issues with tax documentation may seem like a nuisance, there are a lot of tax benefits to using a real estate crowdfunding platform.
Investments typically qualify as long-term capital gains and can be taxed as passive income with no self-employment tax. Accounts can be set up as IRAs, and some platforms will even consolidate Schedule K-1s for their members.
There are many reasons to get involved with real estate crowdfunding. If you're considering it but afraid that taxes might get in the way, don't fear. Although there may be a small learning curve, the benefits you'll receive from your real estate investments will be well worth it.
