chapter 17 income tax and real estate transactions

depreciable assets:

- buildings - equipment -machinery (items used in a business to produce income or held for investment)

straight-line depreciation method

- income producing residential -27.5 years -income producing non-residential -39 years

non-depreciable assets

- personal use assets - land

1) operation income:

-active income ( salaries, business participation) - portfolio income ( dividends, interests, annuities, royalites) -passive income ( invested funds)

Taxpayer Relief Act of 1997

-capital gains rate fell from 28% to 20% -15% bracket was lowered to 10% -the profit from the sale of a personal residence were exempt -exemted from taxation the profit from the sale of personal residence -use of IRA funds toward down-payment without penalty

Basis

A major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out.

Straight-line Depreciation

A method of calculating the depreciation of an asset which assumes the asset will lose an equal amount

Appreciation

A monetary gain resulting from the increase in the market value of an investment, excluding additions of capital, is known as

Capital Gain

A profit that results from a the sale of a property where the amount realized from the sale exceed the purchase price.

27.5 years

Abby owns a 2 family investment property. Using the straight-line depreciation method, over how many years will Abby's property depreciate...?

Tax Depreciation

An annual allowance for the wear and tear, deterioration, or obsolescence of a property is known as

Tax Depreciation

An income deduction that allows a taxpayer to recover the cost or other basis of certain property is known as

Tax Depreciation

An income deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.

Tax Shelter

Any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments.

Taxpayer Relief Act of 1997

As a result of this Act, the top capital gains rate fell from 28% to 20%...?

Boot

Cash received in a tax-deferred exchange.

Tax deduction

David owns a commercial property. In determining the amount of taxes owed, David's accountant subtracts depreciation from the net income to arrive at the taxable income of the property. The tax rate is then multiplied to this number to determine the amount of taxes owed. This is referred to as what...?

DHCR

Division of Housing and Community Renewal

Passive Activity Income

Earnings an individual derives from a rental property in which he or she is not actively involved.

$88,775 (Dollars)

If the net income on a property is $97,500 and the allowable annual depreciation is $8,725, what is the taxable income for the property...?

Active Income

Income for which services have been performed.

27.5 years

Mark owns a single family residence. Using the straight-line depreciation method, what is the theoretical economic life of Mark's property...?

Capital gains

Operations income does NOT include which of the following...?

permitted deductions

Property tax - personal residences - second home - time share - vacant land - inherited property Mortgage Interest - Must file form 1040 - Must file schedule A - tax payer must be legally liable for the loan - Primary home/second home - Acquisition debt or refinancing capital - Construction/Home improvement -Line of credit -Home equity loan

Ordinary income tax rates

Short-term capital gains is taxed at what tax rate...?

$8,181.82 (Dollars)

The depreciable basis for a single family residence is $225,000. Using the straight-line depreciation method, what is the allowable annual depreciation for the property...? This equals $225,000 / 27.5 = $8,181.82.

Capital Loss

The difference between a lower selling price and a higher purchase price, resulting in a financial loss to the seller.

Net Sales Price - Adjusted Basis

The formula for determining realized gains is equal to...?

Adjusted Basis

The original cost of a property minus depreciation and sales of portions thereof plus allowable additions such as capital improvements and certain carrying costs and assessments. A bookkeeping rather than appraisal term.

Net Income

The taxable income of a property is calculated by subtracting the depreciation from this...?

Tax Reform Act of 1986

This Act raised the bottom tax rate from 11% to 15%...? the Low Income Housing Credit (LIHC) was established under this Act...?

Component Depreciation

This means of depreciation breaks down a property into various components and then determines the depreciation on each component separately...?

LIHC

This program was established to promote private sector involvement in the retention and production of rental houses for low income households...?

Economic depreciation

This type of depreciation is described by the physical deterioration of a property...?

Operation income

This type of income is realized by the owner during the year-to-year operations of the property...?

Tax-Deferred Exchange

Under Section 1031 of the US Internal Revenue Code, the exchange of certain types of property may defer the recognition of capital gains or losses due upon sale, and hence defer any capital gains taxes otherwise due.`

IRA funds

Under the Taxpayer Relief Act of 1997, buyers were allowed to use money from these funds toward a down payment without penalties.

$405,000 (Dollars)

What is the Adjusted Basis on a property using the following criteria: Original Purchase Price: $500,000 Capital Improvements: $89,000 Depreciation: $184,000

Taxable Income

When calculating the amount of taxes to be paid on a property, the tax rate is multiplied by this number...?

At the sale of the property Since depreciation is deferred, the owner is still responsible for paying the accrued depreciation when selling the property.

When does depreciation NOT help the owner of a property...?

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.

Land

Which of the following assets are NOT depreciable.

Net proceeds from sale of property

Which of the following is NOT considered operations income...?

Economic depreciation

Which of the following types of depreciation is relevant to real estate...?

Depreciation

a loss of utility and thus value caused by physical deterioration, functional obsolescence or economic obsolescence or any combination thereof

income types

operations income capital gain

basis calculation

original price + capital improvements - depreciation = adjusted basis

realized gain

refers to a gain that is not necessarily taxed. in a successful exchange that gain is realized but not recognized and therefore not taxed

recognized gain

refers to the amount of gain, which is subject to tax when property is disposed of at a gain or profit in a taxable transfer

2) capital gains:

short-term: -asset is held for less than 12 months -ordinary income tax rate long term: -asset is held for more than 12 months - long term capital gains tax rates ( approx. 23.5%) A profit that results from the sale of a property where the amount realized from the sale exceeds the purchase price is known as

component depreciation

the difference between a lower selling price and a higher purchase price, resulting in a financial loss to the seller. For tax purposes, allocating a portion of the total cost of renovation to each component of the renovation (roof, plumbing, electrical, foundation, etc) and then depreciating the cost of each component separately.