Return to Investment Analysis and Tax Benefits in Texas

Jimmy is a real estate investor who owns several rental properties in the area. After the economy took a turn, he was relying on TRA 86 to be able to deduct some of his losses. He is active in the management of the properties and his taxable income is $90,000. What is the maximum deduction Jimmy can claim on his taxes to make up for his losses on those rental properties?

$25,000

Tyrell and Barb bought a commercial investment property in 2009 during the real estate market downturn. Through what year will they be able to depreciate the investment?

2048 (Depreciation may be taken for 39 years for commercial, non-residential property.)

What does "cash-on-cash return" mean?

A comparison of before-tax cash flow to cash invested

Breeja sold her investment property for $330,000. Her adjusted basis in the property was $253,000. The difference between this sale price and the adjusted basis is a(n) ______.

Capital gain

What type of capital gains may property owners encounter?

Short- and long-term

Morgan is a single taxpayer and real estate investor. She buys homes for cheap, fixes them up while living in them, and sells them for a profit. How much can she exclude if she realizes a gain from the sale of her current property (assuming she meets all the criteria to exclude the gain)?

$250,000 (For single taxpayers, the amount of gain that is excluded is $250,000; for married couples filing jointly, it's $500,000.)

What is the capital gains exclusion amount?

$250,000 for single taxpayers, $500,000 for married couples filing jointly (For single taxpayers, the amount of gain that may be excluded is $250,000; for married couples filing jointly, it's $500,000.)

Jim and Crystal bought their rundown little "shack" 15 years ago. Over the years, they've made structural improvements, built additions, and remodeled nearly every square inch of the property. They're ready for their next adventure and have sold their property for a capital gain of $300,000. Assuming they meet all the criteria to qualify for the capital gain exclusion (and are married filing jointly), how much of this gain can they exclude?

$300,000

A property is generating $100,000 in income and has expenses of $25,000. The investor pays $3,000 toward mortgage principal each year and $32,000 toward interest, plus another $4,000 in income taxes. What is the before-tax cash flow?

$40,000 (To arrive at before-tax cash flow, you subtract from income ($100,000) expenses ($25,000) and debt service ($3,000 + $32,000 = $35,000). So $25,000 + $35,000 = $60,000. Then $100,000 - $60,000 = $40,000. You don't subtract income taxes of $4,000.)

Bob just closed on his investment property. He's already identified a replacement property that he'll be exchanging into by using a 1031 tax-deferred exchange. How many days does he have to close on his replacement property?

180 (Investors who want to use the 1031 tax-deferred exchange must identify the property within 45 days and close within 180 days.)

John wants to do a 1031 tax exchange. He just sold his property. How many days does he have to close on a new property?

180 (Investors who want to use the 1031 tax-deferred exchange must identify the property within 45 days and must close within 180 days.)

Your client, Joseph, has a commercial income-producing property. How long does he depreciate this property?

39 years (Depreciation for non-residential income-producing properties is 39 years.)

John wants to do a 1031 tax exchange. He just sold his property. How many days does he have to identify a new property?

45

What type of gain is considered long term?

A gain on a property owned more than one year (Long-term capital gain is an increase in capital resulting from the sale of an asset (such as property) owned for more than one year.)

Jose is an investor who found and closed on an investment property, then decided to sell a property other than the one originally marked for the exchange. What is this an example of?

A reverse tax-deferred exchange

What is a reverse exchange?

An investor finds and closes on an investment property and then decides to immediately sell another investment property.

The sales price, acquisition costs, and capital improvement costs (such as renovations or additions) of a property combine to make up what?

Basis (Basis is the cost of a property and includes the sales price, acquisition costs, and capital improvement costs (such as renovations or additions).

What does "after tax cash flow" mean?

Cash flow after considering income taxes

A comparison of before-tax cash flow to cash invested is known as _________________________.

Cash-on-cash return (Cash-on-cash return is a ratio or percentage of the before-tax cash flow divided by the cash invested.)

In a 1031 tax-deferred exchange, what role does the qualified intermediary serve?

Coordinates the exchange. (The qualified intermediary conducts and coordinates the exchange, including filing IRS paperwork.)

Malcolm purchased an old convenience store, and after renovations will open a small vegan grocery. He paid $517,000, of which $417,000 was for the building, and renovations cost him $107,000. What does the amount $524,000 represent?

Depreciable basis (The acquisition cost of an investment property plus any improvements or renovations is the investment's depreciable basis.)

John sells his single-family home and purchases a new home for his family to reside in. Marcus owns a single-family home, but rents it out to a co-worker while he is on an extended two-year military tour overseas. Donald sells an apartment complex and purchases a new complex in a different part of the city. Which of these consumers is most likely to take advantage of a 1031 tax-deferred exchange?

Donald (Remember, the property must be held for investment or business purposes. Single-family homes don't qualify.)

Which of the following could an investor who sells an apartment house buy using a 1031 exchange?

Duplex, office building, or warehouse (Any of these would be allowed with a 1031 exchange.)

Which of the following statements related to 1031 tax-deferred exchanges is true?

Foreign investors may participate

Which of the following is true about investors and tax depreciation?

Investors can depreciate an appreciating asset.

What advantage does the 1031 tax-deferred exchange offer?

It allows investors to defer capital gains taxes when selling a property, provided they buy another property. (The 1031 tax-deferred exchange allows investors to defer capital gains taxes when selling a property, provided the money is rolled into another "like" purchase.)

Daniel purchased a home in January of 2010 and then sold the property in October of 2014 for a gain of $5,500. What type of capital gain is this?

Long-term

Donald purchased a property five years ago. He lived in the property for a year, then rented it out to a family friend. Now he is selling the property for a capital gain of $10,000. Can he exclude the gain from his taxes?

No, he did not live in the home for two of the preceding five years. (In order to claim the capital gains exclusion, the taxpayer must have lived in the home for at least two of the preceding five years.)

Investor Igor made $120,000 last year, but had $25,000 in losses from his rental properties. Can Igor take the full $25,000 deduction on his taxes, assuming he is actively involved in the management and operation of his rental properties?

No. Igor's $25,000 deduction will be decreased by 50 cents for every dollar he makes over $100,000. (If an investor's income exceeds $100,000, they will lose 50 cents for every dollar over $100,000. Igor's deduction would be reduced by $10,000, because Igor lost 50 cents on the dollar for the extra $20,000 he earned (over the $100,000 mark)

How often can the capital gains exclusion be claimed?

Once every two years (The capital gains exclusion may only be claimed once every two years.)

Under the Tax Reform Act of 1986, real estate investors are allowed to take a maximum of $25,000 in losses to offset their income, under certain conditions. These losses can only be taken if they apply to which type of property?

Rental properties (The first $25,000 of a loss from rental properties can be used to offset income if the investor is actively involved in the management and operation, and if the investor's taxable income (before the deduction is applied) does not exceed $100,000.)

Kayla purchased a home in January, fixed it up, and then sold the property in May of the same year for a gain of $45,000. What type of capital gain is this?

Short-term

In investments, there are two types of depreciation, and each is defined by a particular event. Which of the following most accurately pairs the depreciation type with the event it is tied to?

Tax depreciation and cost recovery (Tax depreciation is tied to cost recovery.)

A like-kind exchange, or 1031 exchange, is also referred to as a ______________.

Tax-deferred exchange (A like-kind exchange, or 1031 exchange, is also referred to as a tax-deferred exchange.)

Recently, Francine and her husband, Frank, decided to purchase and restore a historic home in the downtown area. To be eligible for the tax credit for these renovations, Francine and Frank must follow specific federal guidelines when they renovate and restore the home. In addition, the home must be designated as an actual historic property by which of the following?

The Department of the Interior (The Department of the Interior must have designated the property as an historic property and it must be listed in the National Register of Historic Landmarks.)

Which of the following would be a description of economic depreciation?

The asset is worth less because it's deteriorating physically. (Economic depreciation is often tied to physical deterioration. It is a loss in value from any cause.)

What is the 200% rule as it relates to tax-deferred exchanges?

The combined fair market value of the property (or properties) being exchanged into cannot be more than 200% of the relinquished property. (The combined fair market value of the property (or properties) being exchanged into cannot be more than 200% of the relinquished property.)

In a 1031 exchange, there are rules governed by Section 1031 of the Internal Revenue Code. The rules include _______.

The property in an exchange must be like-kind. (Like-kind is a requirement. The replacement property has to come with the same or greater debt load for the investor, and the basis of the original property carries over to the new property. It must also be a non-owner-occupied (investment) property.)

Investor Ima Goast, who makes about $80,000 a year, has a penchant for historic properties. She decides to purchase a historic property that has been designated as such by the Department of the Interior and listed in the National Register of Historic Landmarks. She hires people to renovate it, and then make it her "forever home." Later, Ima is devastated to discover she hasn't qualified for the tax credit. Why hasn't she qualified?

The renovated historic property cannot be used by Ima as her private residence. (Once renovated, the historic property may not be used as a private residence by the person(s) who renovated it. It can be used as a place of business or a rental. If Ima is using the property as her private residence, the tax credit does not apply.)

How long must a taxpayer have lived in a home in order to claim a capital gain exclusion?

Two of the preceding five years (In order to claim the capital gains exclusion, the taxpayer must have lived in the home for at least two of the preceding five years.)