Year-end investment in a fund that passes through depreciation
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Some real estate funds buy property late in the year, run cost segregation studies on it, and pass the resulting first-year depreciation to their investors. An investor can receive a large loss on their K-1 for the year they invest.
For someone with passive income to shelter, such as gains or distributions from other real estate deals, that loss can offset it. The deal still has to make sense as an investment; the write-off is a bonus, not the reason.
How it works
Some real estate funds buy property late in the year and pass large first-year depreciation to investors on the K-1. That loss can offset other passive income, like gains or distributions from other deals.
What makes it hold up
- The fund’s estimate of first-year losses per dollar invested
- The K-1 when it arrives
- Your other passive income for the year
Risks
Moderate. For most people these losses are passive, so they only offset passive income and otherwise carry forward. The investment still has to be good on its own; the write-off doesn’t fix a bad deal.
Questions to ask your CPA
- How much passive income do I have this year for the losses to offset?
- Does the fund do cost segregation and pass bonus depreciation through?
Common questions
Who benefits most?
Investors with passive income in the same year, such as distributions, gains from other deals or rental profits. Without passive income, the loss carries forward to future years.
Can the loss offset my wages or business income?
Usually not. For most investors these losses are passive. Qualifying as a real estate professional changes that.
How do I know how big the loss will be?
Ask the fund for its estimate of first-year losses per dollar invested, and whether it does cost segregation and passes bonus depreciation through. The K-1 shows the real figure.
When does the K-1 arrive?
Often late, sometimes after the usual filing deadline, so plan to extend your return.
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Education, not advice. Tax law changes and every situation is different, so confirm the details with your CPA or tax advisor before acting. This page was last checked against tax law as of October 2026, including the 2025 tax law, in October 2026.