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).
Land improvements are depreciable additions to land that enhance its utility and value but are separate from the land itself. These assets, such as fences, driveways, and utility systems, have a limited useful life and are subject to specific accounting and tax treatments.
A Limited Liability Company (LLC) is a business structure that protects its owners' personal assets from business debts and liabilities, while offering flexible taxation options.
Loan proceeds are generally not considered taxable income because they represent a debt that must be repaid, not an increase in wealth, under the Accession to Wealth Doctrine.
Long-Term Capital Gains are profits from selling an asset held for more than one year, typically taxed at lower, preferential rates compared to ordinary income, making them a key consideration for real estate investors.
A real estate investment strategy focused on acquiring and holding properties for an extended period, typically five years or more, to generate wealth through rental income, property appreciation, and tax benefits.
A loss on sale occurs when an asset, such as a real estate property, is sold for less than its adjusted cost basis, resulting in a negative return for the seller.
The Low-Income Housing Tax Credit (LIHTC) is a federal tax incentive program designed to encourage the development and rehabilitation of affordable rental housing for low-income individuals and families.
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.
Material Participation refers to IRS criteria determining an individual's active involvement in a business or rental activity, crucial for deducting real estate losses against ordinary income.
A mill rate is a property tax rate expressed as the amount of tax per $1,000 of a property's assessed value, used by local governments to fund public services.
The Modified Accelerated Cost Recovery System (MACRS) is the current tax depreciation system used in the United States for most tangible depreciable property, allowing businesses and real estate investors to recover the cost of assets over a specified period.
Modified Adjusted Gross Income (MAGI) is a crucial metric derived from Adjusted Gross Income (AGI) by adding back certain deductions and exclusions, primarily used to determine eligibility for various tax credits, deductions, and investment-related tax rules.
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