If you invest passively in apartment syndications, your Schedule K-1 can show a loss even in a year when you received cash distributions. Whether you can actually use that loss on your return comes down to the passive activity loss rules, plus a few other limits that apply first. This primer walks through how the IRS describes those rules for the 2025 tax year so you can have a better conversation with your CPA before K-1 season.
This article is general education, not tax, legal or investment advice, and it is not an offer to sell or a solicitation to buy any security. Tax rules change and depend on your situation; talk to your own CPA or tax attorney.
A partnership (most syndications are LLCs taxed as partnerships) "does not pay income tax. Instead, it 'passes through' profits or losses to its partners," and each partner reports their share on their personal return, according to the IRS[1]. The partnership must furnish each partner a Schedule K-1 (Form 1065)[1]. Depreciation is a large non-cash deduction in real estate, which is one reason a property can produce cash flow and still pass through a tax loss.
On depreciation specifically, the IRS says the One, Big, Beautiful Bill "provides a permanent 100-percent additional first year depreciation deduction for qualified property acquired ... after Jan. 19, 2025"[2]. Which parts of a property count as "qualified property" is a technical question for the sponsor's tax preparer, so don't assume a given deal will use it.
The IRS partner instructions for Schedule K-1 list the limits on deducting partnership losses "and the order in which you must apply them": the basis limitations, the at-risk limitations, the passive activity limitations, and the excess business loss limitations[3].
1. Basis. "Generally, a partner may only claim their share of a partnership loss ... to the extent it doesn't exceed their adjusted basis in the partnership," and losses not allowed can be carried forward[3]. The IRS also notes that tracking your basis is the partner's responsibility, and that the capital account shown in item L of the K-1 "can't be used to figure the partner's adjusted basis"[3]. Ask your CPA to keep a basis worksheet for each investment.
2. At-risk. This is a second test of how much you actually have at stake. IRS Publication 925 covers it alongside the passive rules[4].
3. Passive activity. This is the one most investors run into, covered below.
4. Excess business loss. A final cap that applies after the others[3].
Publication 925 says "a rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional"[4]. And "generally, the passive activity loss for the tax year isn't allowed"[4], meaning passive losses mostly offset passive income, not your wages or business income.
Three points matter most for a limited partner in a syndication:
A disallowed passive loss isn't wasted. The K-1 instructions describe basis-limited losses as carried forward[3], and Publication 925 explains that passive losses that haven't been allowed "are generally allowed in full in the tax year in which you dispose of your entire interest" in the activity, as long as all realized gain or loss is recognized and the buyer isn't related to you[4]. For partnerships specifically, those losses "will also be allowed if the partnership (other than a PTP) disposes of all the property used in that passive activity"[4]. In practice, that means losses from earlier years can offset gain when a property sells.
A calendar-year partnership's Form 1065 is due March 15, and partnerships can request an extension by filing Form 7004 by that date[7]. Syndication K-1s often arrive after individual returns are due, so many passive investors plan on extending their own returns. Ask each sponsor when they expect to send K-1s.
Shah Multifamily shares investor education only. Nothing here is tax, legal or investment advice, an offer to sell, or a solicitation of an offer to buy any security. Any offering is made only through official offering documents to verified accredited investors.
For information only. This article is not an offer to sell, or a solicitation of an offer to buy, any security, and is not tax, legal or investment advice.