K-1 Losses Showing Negative While Bank Accounts Show Positive Is Confusing Multifamily Investors – and Costing Them

Written by:

Heather Hook

Date:

10 Aug 2026

KeyCrew Studio

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The moment a real estate investor receives their first K-1 partnership tax return, many assume something has gone wrong. The document shows a loss. Their bank account shows distributions. The two seem impossible to reconcile, and that confusion, according to Steven Libman, founder of Investing With Purpose™, leads investors to misread one of the most valuable features of multifamily investing.

Libman says this disconnect between paper losses and real cash is one of the most common points of confusion he encounters, and it stems from a deeply ingrained association between the word “loss” and actual financial harm. In real estate, he argues, a K-1 loss typically signals the opposite.

Why the Building Loses Money on Paper While You Profit in Cash

The mechanics begin with depreciation. The tax code allows property owners to deduct the wear and tear of a building over time, even though no check is ever written for that wear and tear. For residential real estate, the standard depreciation schedule spreads that deduction over 27.5 years. A cost segregation study, an engineering report that breaks the property into its individual components, can identify which elements qualify for shorter depreciation schedules of five, seven, or 15 years. Under 100% bonus depreciation, anything on a 15-year or shorter schedule can be pulled entirely into year one.

The result, according to Libman, is that a property can generate real, positive cash flow, actual deposits into accounts, while simultaneously producing a tax loss large enough to shelter that income entirely.

“When we are trained to hear loss, we think, ‘Oh no, I lost money,'” Libman says. “And in real estate, a K-1 loss usually means the opposite of what’s happening in real life. It just means that it’s a non-cash expense.”

The K-1 itself connects the property’s depreciation to the individual investor’s tax return. It is a partnership tax document, a slice of the partnership’s income, losses, and deductions, that flows directly into the investor’s personal return. The cost segregation study generates the losses; the K-1 delivers them.

The Carry-Forward Feature Most Investors Don’t Know Exists

Libman says investors most commonly leave value behind by misunderstanding what happens to losses they cannot immediately use. The assumption is that unused losses expire. According to Libman, they do not.

If an investor generates $150,000 in K-1 losses in a given year but only has $100,000 in taxable income to offset, the remaining $50,000 does not disappear. It carries forward indefinitely, available to offset income in future years. This carry-forward feature turns depreciation from a single-year benefit into a long-term tax asset.

“Those carry forward in perpetuity, so that can continue to offset income down the road, not just this year,” Libman says. “It’s not like if you don’t use it, you lose it. You get to keep it.”

An investor who builds a portfolio of multifamily assets over time can accumulate a growing pool of carried-forward losses that continues to shelter income long after the original depreciation was generated. Libman describes this as a compounding effect, not on the losses themselves, but on the capital that would otherwise have been paid in taxes and is instead reinvested.

“It’s partly deferral. It’s not a magic eraser,” Libman says, “but if you’re not paying taxes and it gets to compound while you’re utilizing that depreciation, you can see your net worth climb much faster.”

The Passive Activity Rules That Determine Who Can Use What

The ability to use K-1 losses depends heavily on an individual’s tax situation, and this is where many people make costly assumptions. The IRS distinguishes between passive and active income, and most real estate losses are classified as passive, meaning they can typically only offset other passive income, not W-2 employment income.

For those with a W-2 job, this creates a limitation. However, Libman points to one strategy that can change this picture: the real estate professional designation. Under IRS rules, a taxpayer who spends at least 750 hours annually in real estate activities, not necessarily as a licensed agent, but as an investor, operator, or short-term rental owner, may qualify for treatment that allows those losses to offset other income, including W-2 income when filing jointly with a qualifying spouse.

“If you have a W-2 spouse and you’re a real estate professional, then that depreciation can actually go and offset some of the W-2 income because you’re married and filing jointly,” Libman says.

Those who don’t understand these rules may underestimate the value of their K-1 losses or apply them incorrectly and create compliance exposure.

How Investing With Purpose Structures for Tax Efficiency

At Investing With Purpose, Libman says the firm runs cost segregation studies as a standard part of the acquisition process, generating the depreciation that flows through to K-1s. The firm treats the resulting tax losses as a benefit layered on top of the property’s standalone investment case, not as a substitute for it.

“We underwrite the property as a standalone, and then the tax benefit is kind of the cherry on top,” Libman says. “We never make it part of our underwriting assumptions.”

Libman notes that depreciation does not eliminate the tax obligation permanently. There is recapture when an asset is sold, the IRS claims back a portion of the benefit. But those who purchase a new property in the same year they sell generate fresh depreciation, creating what Libman describes as a stacked tax benefit that continues the cycle. For those treating K-1 documents as paperwork rather than strategy, Libman says understanding these mechanics is a baseline requirement of managing capital responsibly.

More information on the firm’s investment approach is available at https://iwpurpose.com/invest/index.html

About the Expert: Steven Libman is the founder of Investing With Purpose, a faith-driven multifamily real estate firm based in Bluffton, SC.

Disclaimer: This article is based on information provided by the expert source cited above. It is intended for general informational purposes only and does not constitute legal, financial, or real estate advice. Readers should conduct their own research and consult qualified professionals before making any real estate or financial decisions.

Disclosure: Individuals or companies mentioned may have a commercial relationship with KeyCrew.