Who receives a Schedule K-1 Form?
Any person, whether U.S. or international, that has purchased tokens in properties and have earned at least $0.01 of income through their ownership will receive a Schedule K-1 form through the Lofty app dashboard.
We will send out an email notification to all investors who have received a K-1 form as well to inform them how to access the form(s).
This process is the same for both U.S users as well as international users of Lofty.
You will still receive a K-1 form even if you have sold all of your tokens, withdrawn your rental income, and have requested to delete your account and personal data.
Tax years are treated as a standard year, which means it starts on January 01 and ends on December 31.
This means if you only joined the marketplace in 2022 for example, you will not receive any tax documents until 2023.
Do I have to fill out my own K-1 forms?
No. All the income, expenses, and depreciation have been pre-filled in according to your pro-rata ownership in the holding entity for each property you own.
As a result, the form is ready to file as soon as you receive it.
What rates are my earnings taxed at?
Assuming you are a U.S person or a foreign person not subject to tax-withholding, rental income earned is taxed at the nominal income rate.
Realized gains on token prices, if you've sold your tokens for a profit, are taxed at the capital gains rate depending on your holding period. If you held the tokens for less than 1 year, the gains would be taxed as short-term capital gains. If you’ve held your tokens for more than 1 year, the gains would be taxed as long-term capital gains.
Why do I have negative or zero income on my K-1 form?
Depending on the expenses, E.g., repairs made on your property via the maintenance reserve, income lost due to delinquent tenants, and depreciation benefits, you might have $0 or even negative earnings on your K-1 form.
If you have $0 in earnings, you technically do not need to file taxes for these holdings, which can save you a significant amount of money and time with your accountant.
However, if you have negative earnings, then it would be beneficial for you to file the forms.
This is because negative earnings on paper can offset your other tax liabilities.
If you owe $100 in taxes from other investments, but your own paper loss for your property holdings were -$100, you can actually use that paper loss to negate your other gain.
Before you decide on anything, we highly recommend you consult your own tax professional as each person may have their own unique tax situation.
How many K-1 forms will I receive?
All the holding companies for the properties are independent, so you would typically receive one K-1 form for each property you hold tokens for in a given tax year.
Some properties have been bundled together in small groups such as 2 or 3 properties under one holding entity. In those instances, you would only receive a single K-1 form for all the properties in the bundle.
How do I file my K-1 forms?
You can self file the forms through services like TurboTax, but you might have to pay for additional tiers of their software to unlock the K-1 filing service.
If you have a CPA that handles all your taxes, you can simply send them the forms and they will handle the rest.
Some CPAs will charge an additional rate for each additional K-1 form. However, we have been told by CPAs that K-1 forms from your holdings through Lofty are very simple, so if your CPA was charging a high price per K-1, we would recommend you ask them more questions and maybe seek additional quotes from other CPAs.
For US persons for federal taxes only
In general, you would simply lift your on paper earnings reported by each K-1 form and add them together for all your K-1 forms. Then, fill in the final number into your personal 1040 returns in the additional income section.
Next, attach all your K-1 forms to your 1040 returns and send the entire return to the IRS.
Do I have to file for state returns?
You will also be responsible for filing state taxes in the states that properties are located in if those properties have earned money on paper.
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming don't have state income taxes, so in these states, you do not have to worry about filing state income tax.
If your rental income does not exceed $1,000 USD for the tax year from a property investment in a different state than the one in which you reside, many CPAs would recommend you not file taxes in those foreign states.
However, you should always consult your own accountant and make decisions based on your own risk tolerance.