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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
a major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out
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
monetary gain resulting from the increase in market value of an invest­ment, excluding additions of capital
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

sale of property
45 days to identify new property
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


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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