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Income Tax in Real Estate Transactions Cheat Sheet by

Notes on income in real estate transactions for NYS real estate exam

Key Termin­ology

Taxpayer Relief Act of 1997
reduced several federal taxes in the US
IRC Section 121
provides each taxpayer filing a federal tax return an exclusion on capital gains tax when selling their primary residence
capital gain
the difference b/w a lower selling and a higher purchase price, resulting in a financial loss to seller
realized gain
gain that is not necess­arily taxed
recognized gain
amt of gain which is subject to tax when property is disposed of at a gain or profit in a taxable transfer
basis
a major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out
boot
cash received in a tax-de­ferred exchange
recaptured depreciation
when real property is sold at a gain and accele­rated deprec­iation has been claimed, the owner may be required to pay a tax at ordinary (non-a­cce­ler­ated) rates to the extent of the excess accelerate deprec­iation
home equity financ­ing
mortgage that uses qualified home as collateral
appr­eci­ation
monetary gain resulting from the increase in market value of an invest­ment, excluding additions of capital
LIHC
establ­ished under the Tax Reform Act of 1986 to promote private sector involv­ement in the retention and production of rental houses for low income households

1031 Exchange

1.)
sale of property
2.)
45 days to identify new property
3.)
180 days to acquir­e/close on property
Major benefit is that an owner can delay the payment of capital gains taxes, which provides him/her with extra capital to use in the present day
 

Deprec­iation

depreciation
a loss of utility and thus value caused by the physical deteri­ora­tion, functional obsole­scence or economic obsole­scence or any combin­ation thereof
straight-line depreciation
a method of calcul­ating the deprec­iation of an asset which assumes the asset will lose an equal amount of value each year
tax depreciation
an income deduction that allows a taxpayer to recover the cost or basis of certain property’ it is an annual allowance for the wear and tear, deteri­ora­tion, or obsole­scence of the property
Non-­dep­rec­iable assets:
personal use assets; land
Depr­eciable assets:
buildings; equipment; machinery
comp­onent deprec­iat­ion
difference b/w a lower selling price and a higher purchase price, resulting in a financial loss to the seller
Investors can benefit from deprec­iation when they own the property but may be a liability when they sell the property

resid­ential property is deprec­iated over 27.5 yrs
comme­rcial property is deprec­iated over 39 yrs

Income Types

Operations Income
active income
salaries, business partic­ipation
 
portfolio income
dividends, interest annuities, royalties
 
passive income (invested funds)
earnings an individual derives from a rental property in which he/she is not actively involved
Capital Gain
short term
asset is held <12 months
 
long term
asset is held>12 months w/ tax rate approx. 23.5%
Tax exemption applies every 2 yrs provided:
-property is primary residence
-taxpayer has lived in home for at least 2 out of the past 5 yrs
 

Missed­/Unsure Questions

What type of deprec­iation is described by the physical deteri­oration of property?
economic deprec­iation
When calcul­ating the amount of taxes to be paid on a property, the tax rate is multiplied by what number?
taxable income
When deprec­iation is subtracted from net income to determine a property's taxable income, what is the deprec­iation consid­ered?
tax deduction
Using the straig­ht-line deprec­iation method, commercial property is deprec­iated over how many years?
39 yrs
When executing a 1031 exchange, what does the tax code require an owner to purchase?
like-kind properties
       

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