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Notes on income in real estate transactions for NYS real estate exam
Key TerminologyTaxpayer 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 Exchange1.) | 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 | | Depreciationdepreciation | 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 TypesOperations 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 QuestionsWhat 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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