It is important to understand the exact mechanism by which you own the underlying property, because different structures have different tax treatments.
1099 forms are very common in real estate investing for tax purposes. Most properties are held by a LLC holding entity, even if there is only one owner of the LLC.
DAO LLCs are pass-through entities, which means the entity itself doesn’t pay taxes, but passes on the responsibility to its owner(s) instead.
Single-member LLCs would allow the owner to receive 1099 forms, which are very common in the single-family rental market. If you have purchased properties through Lofty and earned money, you will NOT receive a 1099 form.
Instead, you will receive what is called a Schedule K-1 form.
Unlike single-member LLCs, multi-member DAO LLCs are treated, by default for taxes purposes, as a partnership. Partnerships are also pass-through entities, but differ in a few ways.
First, the partnership must produce and file a form called the Form 1065. This basically summarizes the income and expenses incurred by the partnership for the tax year and how much profit/loss it has made as a whole. Instead of the partnership paying the taxes on its profits directly, it passes the responsibility to its members. Those members would pay their pro-rata portion of the partnership’s profits.
Your Form 1065 is sent to the U.S. Internal Revenue Service (IRS), but is not sent to other countries or international agencies.
Imagine a partnership had 10 members. After accounting for all the revenue and expenses incurred during the operation of the partnership for the tax year, the final profit was $100 on paper.
If one of the partners owned 10% of the partnership, they would be entitled to 10% of the partnership’s profits, which would be $10 in this case.