For investors in private real estate syndications, the most significant return event — and often the most anticipated — is the sale of the underlying property. Understanding how proceeds flow from the sale back to investors, and what the tax implications are, prepares investors to evaluate total return expectations accurately.
When a property is sold, the proceeds flow through the entity’s distribution waterfall. Typically, the sequence is: first, repayment of any outstanding debt; second, return of investor principal; third, payment of any accrued but unpaid preferred return; and fourth, distribution of remaining profits according to the agreed profit split between investors and the sponsor.
What to Expect on Your K-1 at Sale
The gain reported on your K-1 at the time of sale includes both the appreciation in property value and the recapture of any depreciation deductions taken during the hold period. Depreciation recapture is taxed at a maximum rate of 25%, while capital gains beyond recapture are taxed at capital gains rates. This is why tax planning before and during a real estate investment — including potential 1031 exchange planning — is worth the effort.
At RIYT, we prepare investors for the tax implications of each investment at the time of offering, providing estimated K-1 ranges so investors can coordinate with their tax advisors before the sale occurs.