1031 exchanges, depreciation, tax benefits, entity taxation, deductions, and tax planning strategies.
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Foundation terms you need to know first (10 terms)
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.
An Individual Retirement Account (IRA) is a tax-advantaged savings plan designed to help individuals save for retirement, offering benefits like tax-deferred growth or tax-free withdrawals.
A write-off in real estate investing is an expense that can be legally subtracted from your gross income to reduce your taxable income and lower your overall tax burden.
Tax burden in real estate refers to the total amount of taxes an investor is responsible for, including property, income, capital gains, and transfer taxes, which directly impact an investment's profitability and cash flow.
A Certified Public Accountant (CPA) is a licensed and highly qualified accounting professional who provides expert financial and tax services, crucial for real estate investors to navigate complex regulations and optimize their investments.
Complex strategies and professional concepts (12 terms)
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).
Boot in a 1031 Exchange refers to any non-like-kind property, such as cash or debt relief, received by an investor that triggers immediate taxation on the lesser of the realized gain or the fair market value of the boot received, thereby partially negating the tax-deferred benefits of the exchange.
A Qualified Opportunity Fund (QOF) is an investment vehicle that allows investors to defer, reduce, and potentially eliminate capital gains taxes by reinvesting those gains into designated low-income urban and rural communities called Opportunity Zones.
Opportunity Zone Investing is a tax-advantaged strategy allowing investors to defer, reduce, and potentially eliminate capital gains taxes by reinvesting eligible gains into Qualified Opportunity Funds (QOFs) that develop or operate businesses in designated low-income communities.
Checkbook control grants the administrator of a self-directed retirement account, typically an IRA or 401(k), direct authority to manage and invest funds by writing checks or initiating electronic transfers from a dedicated LLC, bypassing traditional custodian approvals for each transaction.
A 1031 Exchange allows real estate investors to defer capital gains and depreciation recapture taxes when selling an investment property by reinvesting the proceeds into a new "like-kind" investment property within strict IRS timelines.
1099 income refers to various types of taxable income reported to the IRS on a Form 1099, typically received by independent contractors, freelancers, or for property sales, requiring self-reporting and estimated tax payments.
A 401(k) withdrawal is the act of taking funds from a 401(k) retirement account, often incurring ordinary income taxes and a 10% early withdrawal penalty if done before age 59½ without qualifying for an exception.
The adjusted basis is the original cost of an asset, such as real estate, plus the cost of any capital improvements, minus any depreciation deductions and certain other adjustments. It's crucial for calculating taxable gains or losses upon sale.
After-Tax Cash Flow (ATCF) is the net income generated by an investment property after accounting for all operating expenses, debt service payments, and income taxes, providing a true measure of an investor's take-home profit.
Assessed value is the dollar value assigned to a property by a public tax assessor for the purpose of levying property taxes, typically a percentage of its market value.
Asset segregation is a legal and financial strategy for real estate investors to separate personal assets from investment assets, or to segregate different investment properties from each other, primarily for liability protection and risk management.
The At-Risk Rules (IRC Section 465) limit the amount of deductible losses from an investment activity to the amount an investor is economically exposed to lose, including cash, property basis, and certain recourse or qualified non-recourse debt.
Bonus depreciation is a tax incentive allowing businesses and real estate investors to immediately deduct a large percentage of the cost of eligible property in the year it's placed in service, accelerating tax savings and boosting cash flow.
Boot in a 1031 Exchange refers to any non-like-kind property, such as cash or debt relief, received by an investor that triggers immediate taxation on the lesser of the realized gain or the fair market value of the boot received, thereby partially negating the tax-deferred benefits of the exchange.
A C Corporation is a legal entity separate from its owners, subject to corporate income tax on its profits, and then again to personal income tax when profits are distributed to shareholders as dividends.
Capital Expenditures (CapEx) are significant funds spent by a real estate investor to acquire, upgrade, or extend the useful life of a property, rather than for routine maintenance or operating expenses. These investments enhance the property's value and are typically depreciated over time for tax purposes.
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