As each day passes into the new year, CRE firms are challenged to juggle the chaos of implementing new budgets for the year, launching plans to hit yearly goals, and – a task most sponsors dread – preparing for tax season. K-1s are necessary tax forms for real estate investors to share earnings, losses, deductions, and credits, which allow investors to accurately determine how much income to report for the year. While K-1s are due on March 15th, these documents have a sticky reputation for being tardy and quite often are the last documents to be received by taxpayers. With sponsors regularly asking for updates and investors pushing sponsors to deliver the tax documents in a timely manner, this time of year rightfully has a reputation for being stressful.
Read on to learn pros and cons for different K-1 delivery methods and tips for evaluating which approach is right for your firm.
Outdated Distribution Methods
For many CRE investment firms, the process of delivering K-1 documents is laborious. Managing investor expectations during the preparation, delivery, communication, and investor support for hundreds or thousands of K-1 documents, potentially across multiple countries, can be very time-consuming. Delivery methods can range from email and spreadsheets to file-sharing applications or even snail mail. Lack of automation and integration with these disparate systems adds unnecessary complexity to what is already a formidable task.
It comes as no surprise that at the beginning of each year, real estate sponsors find themselves asking “What is the easiest and fastest way to distribute K-1s to our investors?” Below is a list of popular methods with factors to consider for each.
Delivering K-1s by email has become a popular choice for investors who want electronic forms of the document that can be easily accessed anywhere, anytime. Email is certainly convenient — virtually everyone has an email address. Email also provides tracking abilities and allows firms to simultaneously share multiple forms with individuals and have them arrive in one single communication. Although email may sound like an easy distribution solution, this method has major security and privacy concerns! Emails are susceptible to getting hacked, and highly personal and identifiable information such as social security numbers and home addresses could be compromised. Another consideration before choosing to email K-1s is the scope of the project. Emails have to be crafted and sent individually, one by one to each investor, which is also time consuming and error prone. Emails also have the chance to get lost in investor inboxes and need to be resent multiple times.
Dropbox or File Sharing
Dropbox or other file sharing systems have similar advantages to sending documents over email. It is convenient and quick for everyone. However, a key difference between using file sharing systems and email is the control over a document after you send it. As mentioned above, emails can get lost in someone’s inbox, and they stay there (or in a spam folder) forever. However, with file sharing systems, manual viewing deadlines can be set. After that deadline has passed, you can remove the files from the system. Although more secure than email, this method is limited because not everyone has an account on a file sharing tool. Your investors will need to create accounts before they can access the file sharing system.
Another common method for distributing K-1s is through traditional mail services. Mailing your tax forms is simple, and outside of hand delivering the K-1s, it is likely the best alternative to keep information safe. Customers have options to place safety parameters around the mail services such as requiring a signature or placing tracking information on the letter. It is also illegal to open someone else’s mail in the United States. Using snail mail may seem like the easy choice, but it does still require considerable time and organization on behalf of the Sponsor, with administrative duties including printing, sealing envelopes, and getting them to the post office . Another consideration before sending documents by mail is that investors often have multiple residences or business addresses, and your data may not reflect the investors’ latest preferences. Lost mail needs to be resent, which can be labor intensive for the individual investor and make them nervous that there is a lost envelope with personally identifiable information. Mail can also be damaged and even sent back to the original sender in case of deliver-ability issues. And of course there is still the opportunity for human error, such as mislabeling the envelopes and distributing the wrong documents to investors.
As mentioned above, sensitive tax documents like Schedule K-1s are traditionally sent via email or regular mail. Besides numerous security vulnerabilities, these methods are also extremely time-consuming and prone to error.
Deals are often funded by investors from all over the globe, whose addresses on file may or may not be current. As a result, distributing physical K-1s through the mail (and then confirming receipt) can be a real headache. Investor management software can eliminate many of the pains and risks of traditional delivery methods. A fully-integrated, secure, and encrypted portal provides investors with quick and easy access to tax documents that can be downloaded at their convenience.
Online tax document distribution via investor management software automates many manual processes and allows CRE firms to scale, simplifying a process that formerly took days or weeks to complete into just a matter of hours.
Benefits of Online K-1 Distributions
A software solution can drastically automate the K-1 matching and uploading processes. By managing the entire investment lifecycle in one software solution, you eliminate redundancies and can leverage integrations built into the platform. K-1 documents can be imported into the system and matched to investors within your CRM with little to no work needed from the Sponsors. And with this process, investors can manage the entire investment management life cycle, from initial investment through the final return of capital.
Half the battle of distributing K-1s to investors is making sure investors understand the K-1 distribution date, where to locate the files, and what personnel resources they can contact to get additional support. Investor management software creates scalable solutions for improved communication via seamless integrations, investor portal notifications, and bulk email functionality. These capabilities enable sponsors to efficiently notify hundreds of investors via email with unique and secure links to access the documents on their secure portals directly from a button in the body of the email.
Investors expect transparency and desire their sponsors to provide them with information both when they want it and how they want it. Investor management software offers a private portal where investors are able to gather information they care most about with the convenience of 24/7 access. The encrypted logins add an extra layer of security which helps both sponsors and investors sleep a little easier during tax season knowing their tax documents are easily accessible and secure.
About RealPage AIM
RealPage AIM provides solutions to help sponsors prepare and execute on a successful tax season by bulk uploading K-1 documents directly to Investor Portals. Simply upload the documents and let us do the work for you! Our system will intuitively match the document to the associated investor through their Tax ID, which allows Sponsors to upload documents quickly and publish at scale.
Tax season is just around the corner, but it’s not too late to pull off your best season yet! See how RealPage AIM can provide your firm an end-to-end solution for K-1 distribution. Ask us how.