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