Chp 16 - real estate income tax

Construction financing (interest deductions)

- Can treat the home as a qualified home for upto 24 months - must become qualified home when ready for occupancy

Depreciable assets

- buildings - equipment -machinery

Home acquisition financing (interest deductions)

- cannot be more than $1 million (married) - cannot be more than $500,000 (single) - Limit is reduced but never below zero (grandfather debt)

Capital gain taxes:

- federal capital gain tax - state capital gain tax - city capital gain tax

POINTS

- origination fee - loan discount -discount points

Non-depreciable assets

- personal use assets - land

1031 exchange diversifications:

-geographic -product (like kind)

1031 exchange

-like-kind exchange swap properties

Home equity financing (interest deductions)

-mortgage that uses qualified home as collateral _smallest of either : $100,000 (married) or $50,000 (single) or Property value - acquisition debt - grandfathered debt = home equity debt

Income types:

1. operations income - Active income (salaries, business participation) - portfolio income (dividends, interest, annuities, royalties) - passive income (invested funds) 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%)

1031 exchange process:

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

Basis

A major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out Calculation: Original Purchase Price + Capital improvements - depreciation = adjusted basis

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. - systematic deduction of a property over time.

Boot

Cash received in a tax-deferred exchange

Straight-line depreciation method

Income producing residential - 27.5 years. Income producing non-residential - 39 years - a method of calculating the depreciation of an asset which assumes the asset will lose an equal amount of value each year

Tax Reform act of 1986

Lowered top tax rate from 50% to 28% and raised the bottom tax rate from 11% to 15%

NYS Division of Housing and Community Renewal (DHCR)

NYS administrative agency which regulations residential housing subject to rent stabilization and rent control

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

Internal Revenue Code (IRC) SEction 121

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

Capital loss

The difference between a lower selling price & a higher purchase price, resulting in a financial loss to the sell

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

Recognized gain

What the taxes are actually paid on. -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

Depreciation

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

Economic // 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 physical deterioration of property while you're owning it

Capital gain

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

Deduction

apply tax rates and reduce amount from tax income.

Tax credit

dollar for dollar reduction in your tax liability.

Passive activity income

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

Active income

income for which services have been performed

Tax payer relief act of 1997

it reduced several federal taxes in the US. Subject to certain phase-in rules, the top capital gains rate fell from 28% to 20%. The 15% bracket was lowered to 10%. - capital gains rate fell from 28% to 20% - the 15% bracket was lowered to 10% - The profits from the sale of a personal residence were exempt - exempted from taxation the profit from the sale of the personal residence -tax payers can claim exemption every 2 years $500,000 exemption if sold. - Use of IRA funds toward down-payment without penalty. ( use up to $10,000 from IRA account)

Installment sale

tax payer sell their property and receive note as tax receives money, they also pay prorated tax - Section 453

Realized gain

the amount that's been gained when buying & then sellign the house. Refers to a gain that is not necessarily taxed. In a successful exchange the gain is realized but not recognized and therefore not taxed Calculation: Sales price - selling costs = Net Sales Price - Adjusted basis = REALIZED gain

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.

Cash flow

the net result when income from an investment property is subtracted from the expenses. The result is used to determine the rate of return on an investor's money.

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 gin and accelerated depreciation has been claimed, the owner may be required ot pay a tax at ordinary (non accelerated) rates to the extent of the excess accelerate depreciation