Notes on income in real estate transactions for NYS real estate exam
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Taxpayer Relief Act of 1997
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reduced several federal taxes in the US
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IRC Section 121
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provides each taxpayer filing a federal tax return an exclusion on capital gains tax when selling their primary residence
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capital gain
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the difference b/w a lower selling and a higher purchase price, resulting in a financial loss to seller
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realized gain
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gain that is not necessarily taxed
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recognized gain
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amt of gain which is subject to tax when property is disposed of at a gain or profit in a taxable transfer
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basis
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a major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out
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boot
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cash received in a tax-deferred exchange
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recaptured depreciation
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when real property is sold at a gain and accelerated depreciation has been claimed, the owner may be required to pay a tax at ordinary (non-accelerated) rates to the extent of the excess accelerate depreciation
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home equity financing
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mortgage that uses qualified home as collateral
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appreciation
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monetary gain resulting from the increase in market value of an investment, excluding additions of capital
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LIHC
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established under the Tax Reform Act of 1986 to promote private sector involvement in the retention and production of rental houses for low income households
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1.)
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sale of property
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2.)
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45 days to identify new property
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3.)
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180 days to acquire/close on property
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depreciation
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a loss of utility and thus value caused by the physical deterioration, functional obsolescence or economic obsolescence or any combination thereof
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straight-line depreciation
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a method of calculating the depreciation of an asset which assumes the asset will lose an equal amount of value each year
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tax depreciation
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an income deduction that allows a taxpayer to recover the cost or basis of certain property’ it is an annual allowance for the wear and tear, deterioration, or obsolescence of the property
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Non-depreciable assets:
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personal use assets; land
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Depreciable assets:
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buildings; equipment; machinery
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component depreciation
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difference b/w a lower selling price and a higher purchase price, resulting in a financial loss to the seller
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Operations Income
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active income
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salaries, business participation
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portfolio income
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dividends, interest annuities, royalties
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passive income (invested funds)
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earnings an individual derives from a rental property in which he/she is not actively involved
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Capital Gain
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short term
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asset is held <12 months
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long term
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asset is held>12 months w/ tax rate approx. 23.5%
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What type of depreciation is described by the physical deterioration of property?
economic depreciation
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When calculating the amount of taxes to be paid on a property, the tax rate is multiplied by what number?
taxable income
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When depreciation is subtracted from net income to determine a property's taxable income, what is the depreciation considered?
tax deduction
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Using the straight-line depreciation method, commercial property is depreciated over how many years?
39 yrs
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When executing a 1031 exchange, what does the tax code require an owner to purchase?
like-kind properties
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