The Quick Read: A K-1 partner can pull equity from a home or rental through a bank statement cash-out, qualifying on the distributions that actually reach the bank account instead of the income allocated on the tax return, then moving the cash into the business as a documented capital contribution or partner loan. Two tests control the size of the draw, and the tighter one wins.
- Income test: 12 months of statements, with qualifying income built from deposit averages after an expense factor.
- Equity test: owner-occupied cash-out tops out around 80% LTV, and investment-property cash-out around 75% LTV, subject to lender guidelines.
- Only distributions to the partner count. Capital contributions, transfers between your own accounts, and loan proceeds do not.
- Size the draw to the expansion budget plus a buffer, then stress-test the new payment against a slow ramp-up.
What Is a Bank Statement Cash-Out for a K-1 Partner?
A bank statement cash-out is a refinance that replaces your current mortgage with a larger one and hands you the difference. The twist is the income proof. The file is reviewed on documented income under the applicable program, subject to lender guidelines, and that documentation is a year of bank statements instead of traditional personal-income documentation.
Partners use it because the tax return often tells the wrong story. A partnership can write off heavy depreciation, equipment, and startup costs, so your share of income on paper can look thin while real cash moves through the business. A conventional underwriter reads the paper. A bank statement program reads the deposits.
Lendmire, a mortgage broker, arranges these files through select lenders in its wholesale network. Each lender sets its own method, which is why the same partner can see different results from different programs. Lendmire’s consumer mortgage licensing covers 16 states, and every file is underwritten individually.
Key Terms Defined
K-1: The form a partnership issues to each partner showing that partner’s share of the entity’s income, deductions, and credits.
Distribution: Cash the partnership actually pays out to you. It is what shows up in your bank account.
Expense factor: The percentage a lender subtracts from deposits to estimate business costs before counting the rest as income. Lenders set their own factors.
Seasoning: The waiting period a lender wants between buying or refinancing a property and doing a new cash-out on it.
LTV (loan-to-value): The loan balance divided by the property’s appraised value.
Capital contribution: Money you put into the partnership as added ownership equity rather than as a loan.
Why K-1 Income Often Misses the Real Cash Flow
A K-1 shows allocated income, not cash received. The IRS partner instructions for Schedule K-1 explain that a partner may owe tax on a share of income whether or not the partnership distributes it. The reverse also happens. A partner can receive large distributions while the K-1 shows modest income.
The numbers sit in specific boxes. The IRS instructions for partners on Schedule K-1 walk through your copy of the form: ordinary business income in Box 1 and net rental real estate income in Box 2. Heavy deductions can leave Box 1 low even when plenty of cash runs through the entity. That gap is what bank statement programs were built to bridge.
| Factor | Qualifying on K-1 / returns | Qualifying on bank statements |
|---|---|---|
| Income measured | Allocated share on the return | Deposits actually received |
| Effect of write-offs | Lowers qualifying income | Not directly counted |
| Documents | Returns, K-1s, entity filings | 12 months of statements, ownership proof |
| Weak spot | Paper income understates cash | Deposit scrutiny, expense factor |
Neither path is better in every case. If your return already shows strong income, a standard program may serve you well. If your write-offs are heavy and your distributions are steady, the statement route usually fits better.
Which Deposits Count for a Partner?
Only distributions from the partnership into your account count as income. This is the most important line in the whole file. Everything else in the account gets screened out.
Lenders generally exclude transfers between your own accounts, loan proceeds, capital contributions you put in, and one-off items like a property sale or investment gain. They also expect deposits to look consistent with the type of business. Large unexplained deposits draw questions, and a lender may ask for a written explanation or exclude them.
Account type matters too. Most programs want either personal statements or business statements, not a blend. A few lenders in the network accept mixed accounts, but many do not. If you have been paying household bills out of the business account, clean that up before you apply.
A partner’s personal account may not receive the distributions at all. Some partnerships pay through a holding entity or a different account. Trace where the money lands, and choose the statements that show it clearly.
Step by Step: How Underwriting Treats the File
Here is the sequence a lender follows on a K-1 partner file.
1. Choose the product. A bank statement loan is reviewed around deposits. A DSCR loan is reviewed for a rental property on its rent. This article covers the first. Lendmire’s piece DSCR Loan Vs Bank Statement Loan For Investors shows when each one fits.
2. Pick personal or business statements. Twelve months is the standard documentation window across the programs Lendmire places.
3. Screen the deposits. Transfers, contributions, and loan proceeds come out. Distributions stay.
4. Apply ownership share and expense factor. Your ownership percentage, proven by a K-1 or the partnership agreement, determines how much of the entity’s deposits you can count. The expense factor then reduces what remains. Exact factors vary by lender, and no one should promise you a universal number.
5. Run the full-file test. Bank statement loans keep a personal debt check. Your existing obligations still count, and you must show reserves, commonly around 6 months of the housing payment.
6. Set the proceeds. Property value, the LTV cap, seasoning, and the payoff of the existing loan determine how much cash comes out.
Loan sizes in this lane run from roughly $125,000 to $3,500,000, depending on the program and your credit.
The Two Tests: Income and Equity
Your draw is limited by whichever test is tighter. Think of them as two doors, and you can only pass through the narrower one.
The equity test is simple. On an owner-occupied cash-out, a primary residence or second home, the ceiling is up to 80% LTV with a fixed expense ratio, or 75% when an accountant prepares the ratio, set by loan size and credit. On an investment property, cash-out tops out around 75% LTV. The 90% figure that applies to primary-residence purchase and rate-term refinance does not apply to cash-out. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
The income test asks whether your qualifying income supports the new obligation alongside your other debts. Here is how the two can diverge, using ratios rather than dollar amounts.
Say your home carries an existing balance equal to 55% of its value. At an 80% owner-occupied cash-out ceiling, equity allows headroom of roughly 25% of value before costs. But if your post-expense deposit income leaves little room against your other debts, income caps the draw below that. In that case, equity is not the constraint. Income is.
Flip it. A partner with strong, steady distributions but a home already financed near 70% of value may be limited by equity even though income looks fine. Know which door is narrower before you size the project.
For borrowers who hold significant liquid assets, an asset-depletion alternative is reviewed on those assets instead of income, up to about 80% LTV on a primary residence. It can help a partner whose distributions are lumpy but whose accounts are deep. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
Size the Draw to the Budget, Then Stress-Test It
Work backward from the project, not forward from the maximum. Start with the full expansion cost, add a buffer for overruns and a slow opening period, and that total is your target draw. If the target exceeds what the two tests allow, the project needs a smaller scope, a partner co-investment, or a different funding source.
Then stress-test the payment. The method is a coverage ratio.
1. Estimate the added monthly profit the expansion should produce at full ramp-up.
2. Divide it by the added monthly obligation from the larger loan. That gives a coverage ratio.
3. Repeat the math at half the projected profit.
A project that covers the new obligation about 1.5x at full ramp-up but falls to roughly 0.75x at half ramp-up means you are funding the gap from other income. That can be fine for a short stretch. It becomes a problem when the ramp-up runs long. Lenders do not require this exercise, but a sharp borrower does it anyway, because the collateral is your home.
Getting the Cash Into the Partnership
The partnership is not the owner of your residence, and it is generally not the borrower on a personal-residence loan. You borrow personally, then move the money into the business. Two common routes exist.
- Capital contribution: The cash becomes added equity in your partnership account. It adjusts your capital account and may shift ownership percentages.
- Partner loan: The partnership owes you the money, ideally under a written note.
Which one fits depends on your partnership agreement and your tax situation, so settle it with the other partners and a CPA before the funds move. Lenders typically ask about the purpose of the loan but do not underwrite your business plan. Keep the paper trail clean either way.
Where the General Rule Breaks
Several edge cases change the answer.
Minority partners. Ownership share can limit how much of the entity’s deposits you may count. Programs differ on the threshold and on how they credit partial ownership, so ask before assuming a full count.
Mostly passive or rental K-1 income. The IRS Form 1065 instructions report rental income separately from trade or business income. Distributions from a real estate partnership may be treated differently from operating-business deposits by some lenders.
Distributions versus allocated income. When the K-1 exceeds or trails cash paid out, the deposits tell the truer story, which is the reason the program exists.
Commingled accounts. Mixed personal and business activity creates friction. Some programs refuse it.
Seasoning. If you recently bought or refinanced, a lender may require a waiting period before cash-out. Terms follow individual lender program sheets.
Term length. Alt-doc term options follow each lender’s program sheet. Extended structures such as 40-year or interest-only terms belong to the DSCR side, and no one should expect them on a bank statement loan.
Which Disclosure Rules Apply?
Occupancy decides the regime. An owner-occupied cash-out on a primary residence or second home is a consumer mortgage, so consumer disclosure rules apply, including TRID. A bank statement loan on a non-owner-occupied rental, including a short-term rental, is business-purpose and exempt from TRID. Short-term rental rules can vary by city, county, HOA, and property type, so investors should confirm local rules before relying on projected rental income.
On the consumer side, lenders must make a reasonable, good-faith repayment determination and verify their sources. In short, a bank statement loan is still underwritten. Whether that rule reaches a given business-purpose loan is a question for compliance counsel, not something to assume.
Bank Statement, DSCR, or Something Else?
| Situation | Better fit |
|---|---|
| Strong deposits, weak tax return | Bank statement cash-out |
| Rental whose rent covers its payment | DSCR cash-out |
| Large liquid assets, uneven income | Asset-depletion option |
| Small, short-term cash need | HELOC or home-equity loan |
| Project can stand on its own cash flow | Business loan |
If the property is a rental that covers its own payment, DSCR avoids the personal debt test altogether and qualifies primarily on property-level rental income covering the payment, subject to lender guidelines. Programs below 1.00 coverage are available through select lenders in the network, though LTV and terms adjust. Lendmire’s complete DSCR loans guide explains that side in full. The choice comes down to which is stronger: your deposits or the property’s rent.
When Not to Do This
Using a personal residence to back business risk is the central danger. If the expansion underperforms, the debt stays with you and the house stays pledged. Skip the cash-out if the project only works under best-case assumptions, if your reserves are thin, or if a partner dispute is brewing. Another sound reason to pause: the new obligation would depend on distributions you do not control.
For a broader view of how lenders treat this use of funds, see Lendmire’s piece Can a Bank Statement Cash-Out Refinance Fund a Business Expansion?.
Tax treatment varies by how the funds are used and how the property is held; consult a qualified tax professional.
Statement-Readiness Checklist
- Pull 12 months of statements from the account that receives your distributions.
- Label transfers, contributions, and one-off deposits in writing.
- Separate personal spending from business activity.
- Gather your K-1s and partnership agreement to prove ownership share.
- Document reserves and the source of any funds you will show.
- Write down the expansion budget, buffer, and ramp-up assumptions.
Frequently Asked Questions
Can I use a bank statement cash-out if my K-1 shows low income?
Often, yes, because the program looks at deposits rather than the allocated figure on the K-1. The file is reviewed on documented income under the applicable program, subject to lender guidelines. Steady distributions with clean statements make the strongest case.
Do capital contributions I made to the partnership count as income?
No. Money you put in is excluded, as are transfers between your own accounts and loan proceeds. Only distributions paid to you count, which is why account labeling matters.
Can I mix personal and business accounts?
Most programs do not allow it, though a few lenders in the network do. Mixing slows review and invites questions, so clean accounts are the safer path.
How much cash can I take out?
It depends on the tighter of two tests. On an owner-occupied cash-out the ceiling is up to 80% LTV, and on an investment property it is around 75% LTV, both subject to your income, credit, and the lender’s guidelines. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
Should the cash go in as a loan or a contribution?
That depends on your partnership agreement and tax picture. Decide it with your partners and a CPA before moving the money, and document the choice either way.
Next Step
For how equity extraction works on an investment property, see Lendmire’s guide to cash-out refinance on an investment property.
About Lendmire
A DSCR-focused mortgage broker, Lendmire (NMLS# 2371349) places investor financing across 41 markets — 40 states plus Washington, D.C. — with DSCR eligibility generally reviewed by the lender on property cash flow instead of traditional personal-income documentation, subject to lender guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in 2025 and 2026.
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References
1. IRS Partner’s Instructions for Schedule K-1 (PDF)
2. IRS Partner’s Instructions for Schedule K-1
This article is part of Lendmire’s bank statement loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Bank Statement Cash-Out vs Business Loan Without Usable Returns · How a Self-Employed Owner Pays Off Debt With a Bank Statement HELOC · How a Bank Statement HELOC Reads S-Corp Distributions Despite a Loss
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.