1031 exchanges, depreciation, tax benefits, entity taxation, deductions, and tax planning strategies.
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Foundation terms you need to know first (24 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 (46 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.
Tax-exempt debt refers to bonds or other debt instruments issued by governmental entities or qualified private entities, where the interest earned by the bondholder is exempt from federal, and often state and local, income taxes.
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).
A tax lien is a legal claim placed on a property by a government entity due to unpaid property taxes, taking precedence over most other liens.
A tax lien auction is a public sale where investors can purchase property tax liens from local governments, earning high-yield interest on delinquent property taxes until the property owner pays the debt or the investor can initiate foreclosure proceedings.
A tax strategy where investors sell assets at a loss to offset capital gains and a limited amount of ordinary income, reducing their overall tax liability.
A tax overpayment occurs when an individual or business pays more tax to the government than they legally owe, typically resulting in a tax refund.
Tax planning in real estate involves strategically optimizing an investor's tax liabilities through proactive financial and legal decisions, leveraging deductions, credits, and deferral strategies to maximize after-tax returns and ensure compliance.
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.
Tax reporting for real estate investors involves accurately documenting all income, expenses, and capital events related to investment properties to comply with IRS regulations and optimize tax liabilities.
Tax returns are official documents filed with tax authorities, such as the IRS, reporting an individual's or entity's income, expenses, and other financial information to determine tax liability, serving as a critical financial record for real estate investors.
A tax shelter is a legal financial arrangement or investment strategy designed to reduce or eliminate an investor's taxable income and, consequently, their tax liability.
A reduction in taxable income, and thus tax liability, achieved through deductible expenses like depreciation, interest on debt, or operating losses, commonly utilized in real estate to enhance investment returns.
Tax-advantaged investing involves strategies designed to minimize an investor's tax liability on investment income and gains, thereby maximizing after-tax returns. In real estate, this often includes leveraging deductions, deferrals, and credits.
A financial strategy where investment earnings, such as capital gains or interest, are not taxed until a later date, typically when the funds are withdrawn.
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