Chapter 17 - Income Tax in RE Transactions

The Tax Payer Relief Act of 1997

- Capital gains rates fell from 28% to 20% - 15% bracket lowered to 10% - Profits from sale of personal residence were exempt - Use of IRA funds toward downpayment

1031 Exchange Process

1. sale of property 2. identification of property 3. acquisition of new property

How much of the purchase price of a condominium is eligible for depreciation...?

100%

The Taxpayer Relief Act of 1997 allowed homeowners to realize a $250,000 - $500,000 tax exemption at the sale of their property. However, the homeowner must have lived in the residence for how many years, within the past 5 years...?

2 years

Under the Taxpayer Relief Act of 1997, a single filer can qualify up to how much in tax exemptions...?

250,000

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

27.5 years

Under the Taxpayer Relief Act of 1997, joint filers can qualify up to how much in tax exemptions...?

500,000

Low income may be considered a household income that is ______% or less of the average area household income in that year

60%

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 of value each year.

Capital Gain

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

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.

Boot

Cash received in a tax-deferred exchange.

According to the IRS, which of the following property types is NOT considered a permitted deduction on one's tax return...?

Income Producing Properties

Appreciaton

Monetary gain resulting from the increase in the market value of an investment, excluding additions of capital. For example, a house which is sold five years after it was purchased for 50% more than the purchase price.

DHCR

NYS Division of Housing and Community Renewal . - Regulates residential housing subject to rent stabilization and rent control

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

Operation Income

Which of the following is NOT considered a depreciable asset...?

Personable Use Assets

Internal Revenue Code (IRC) Section 121

Provides each tax payer filing a federal tax reserve an exclusion on capital gains tax when selling their primary residence

According to the IRS, mortgage interest is considered a permitted deductible on this property type...?

Secondary Residence

Capital Gains Short term vs long term

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%)

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...?

Tax Deduction

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

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

Tax Payer Relief Act 1997

Due to this Act, the profits from the sale of a personal residence were allowed to be exempt...?

Tax Payer Relief Act 1997

The Low Income Housing Credit (LIHC) was established under this Act...?

Tax Reform Act 1986

This Act raised the bottom tax rate from 11% to 15%...?

Tax Reform Act 1986

Capital Loss

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

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.

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.

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.

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.

Property taxes on non-investment properties can only be deducted if one's taxes are _________

itemized

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.