As a partner in the Horizon Residential Income Fund I, LLC (HRIF), you may have noticed that the Qualified REIT Dividend reported on your K-1 doesn’t match the final distribution amount you received. That’s expected—and here's why.
Accrual vs Cash Basis Accounting
First, it is important to note that Horizon utilizes Accrual basis accounting methods, meaning Horizon recognizes revenues when earned and expenses when incurred, regardless of when cash is received or paid. Net Income and Distribution amounts reported on your K-1 will reflect accrued income for year-end 2024, rather than cash received in 2024.
U.S. GAAP Book Income vs. IRS Reported Taxable Income
As a fair value investment company, Horizon is required to report under U.S. GAAP standards, which requires recognizing certain unrealized gains/losses to determine adjustments in the Fund’s book value. As such, Horizon must report unrealized losses on a quarterly basis related to non-performing loans. The unrealized losses are then deducted from the Fund’s net income, reducing the final distribution amount partners receive.
Conversely, as required by the IRS, unrealized losses cannot be deducted when determining final taxable income. Losses can only be deducted once the asset is disposed of and the reported loss is realized.
Therefore, reported taxable income for year-end 2024, which is reported as the net income amount on the K-1, will be higher than the reported distribution amount. This difference is especially common in REIT structures like Horizon.
Timing of Unrealized vs Realized Losses
While unrealized losses are not allowable deductions for tax reporting, the IRS does allow for these deductions if losses become realized. As Horizon’s non-performing loans progress through the workout process in 2025, the disposition of these assets will allow for Horizon to report the realized loss, to the extent there is one. For all non-performing assets with a realized loss in 2025, partners will be able to include a deduction against their 2025 taxable income.
Thank you for your continued trust and support in Horizon Residential Income Fund I, LLC and we look forward to a successful and rewarding journey together.
Sincerely,
The Horizon Team
**Disclaimer - Horizon Residential Income Fund I, LLC does not provide tax advice or guidance. Partners of Horizon Residential Income Fund I, LLC should consult with a qualified tax professional for interpreting and filing their tax returns.