1031 exchanges, depreciation, tax benefits, entity taxation, deductions, and tax planning strategies.
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Foundation terms you need to know first (22 terms)
Accrual basis accounting records revenues when they are earned and expenses when they are incurred, regardless of when cash actually changes hands. This method provides a more accurate picture of a business's financial performance over time.
A tax refund is a reimbursement to taxpayers of excess tax paid to the government. For real estate investors, it represents a potential source of capital for new investments or property improvements.
The marginal tax rate is the tax rate applied to your very last dollar of taxable income. It's crucial for real estate investors to understand how additional income or deductions will impact their tax bill.
A tax credit is a direct reduction in the amount of tax owed, dollar-for-dollar, providing a significant financial benefit to real estate investors by lowering their overall tax liability.
An Employer Identification Number (EIN) is a unique nine-digit number assigned by the IRS to identify a business entity for tax purposes, often required for real estate investment structures like LLCs and partnerships.
Complex strategies and professional concepts (35 terms)
The accounting process of recognizing the estimated cost of an Asset Retirement Obligation (ARO) as a liability and capitalizing a corresponding asset, which is then depreciated over its useful life, reflecting the future costs associated with retiring a long-lived asset.
Unrelated Business Income Tax (UBIT) is a tax levied on the net income of a tax-exempt organization, including certain real estate investment vehicles, derived from a trade or business regularly carried on and not substantially related to its exempt purpose.
Premium financing is a sophisticated financial strategy where an investor borrows funds from a third-party lender to pay the premiums on a large insurance policy, typically a life insurance policy or substantial commercial property insurance, using the policy itself or other assets as collateral.
A Self-Directed IRA (SDIRA) is a specialized retirement account allowing investors to hold alternative assets like real estate, private equity, and precious metals, offering enhanced control but requiring strict adherence to complex IRS regulations to avoid prohibited transactions and Unrelated Business Income Tax (UBIT).
Revaluation surplus is an equity account on a company's balance sheet, representing the unrealized gain arising from the revaluation of an asset, typically property, plant, and equipment, to its fair value, exceeding its historical cost or previous revalued amount.
Real estate tax planning involves strategically managing real estate investments to minimize tax liabilities and maximize after-tax returns, utilizing various deductions, deferrals, and entity structures.
Reasonable cause is a valid justification recognized by the IRS for failing to meet tax obligations, such as filing or paying on time, which can lead to the abatement of associated penalties.
The recapture tax rate is the specific tax rate, typically up to 25%, applied to the portion of a real estate investment's gain that is attributable to previously deducted depreciation when the property is sold.
Recognized gain is the portion of a capital gain from the sale or exchange of an asset that is immediately subject to taxation in the current tax period. It represents the profit realized that cannot be deferred or excluded under specific tax provisions.
A replacement property is a real estate asset acquired in a 1031 exchange to defer capital gains taxes on the sale of a previous investment property, provided it meets specific "like-kind" and value requirements.
A Required Minimum Distribution (RMD) is the minimum amount that a retirement plan account owner must withdraw annually once they reach a certain age, typically 73, to avoid significant tax penalties.
Revaluation surplus is an equity account on a company's balance sheet, representing the unrealized gain arising from the revaluation of an asset, typically property, plant, and equipment, to its fair value, exceeding its historical cost or previous revalued amount.
A Rollover IRA is an Individual Retirement Account used to transfer funds from an employer-sponsored retirement plan, such as a 401(k) or 403(b), into an IRA, typically without incurring immediate taxes or penalties.
A financial strategy involving moving pre-tax retirement funds from a traditional IRA or 401(k) into a Roth IRA. This conversion incurs taxes on the converted amount in the year of conversion, but allows for tax-free withdrawals in retirement, provided certain conditions are met.
Roth IRA tax-free withdrawals allow eligible individuals to access their contributions and earnings completely free of federal income tax in retirement, provided specific age and holding period requirements are met. This makes them a powerful tool for tax-efficient wealth accumulation, especially for real estate investors.
An S Corporation is a federal tax designation for eligible domestic corporations that allows profits and losses to be passed directly to the owners' personal income without being subject to corporate tax rates, avoiding double taxation.
The SALT (State and Local Tax) deduction limit is a federal tax provision capping the amount of state and local taxes that can be deducted from federal taxable income at $10,000 per household, significantly impacting real estate investors in high-tax states.
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