What Is Phantom Income?

Phantom income is taxable income you must report on your tax return even though you haven't actually received any cash to pay the resulting tax. Common examples include your share of a partnership's earnings reported on a Schedule K-1, even if the partnership reinvested all profits and didn't distribute any money to you. Cancellation of debt income is another form of phantom income — when a lender forgives a portion of what you owe, the IRS treats the forgiven amount as income even though you didn't receive a check. For real estate investors, phantom income can arise in later years of ownership when depreciation deductions run out but your share of taxable income is still being allocated. Planning ahead for phantom income is important because you can end up with a significant tax bill in a year when you've received little or no actual cash from the investment.