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 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 90% Distribution Rule mandates that Real Estate Investment Trusts (REITs) distribute at least 90% of their taxable income to shareholders annually to maintain their tax-advantaged status.
Absorption costing, also known as full costing, is an accounting method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed overhead—in the cost of a product. It is crucial for inventory valuation and financial reporting, especially in real estate development.
The Accession to Wealth Doctrine is a fundamental tax principle asserting that all undeniable accessions to wealth, clearly realized, over which taxpayers have complete dominion, are taxable as gross income, regardless of their source or form.
Accretion expense represents the periodic increase in the carrying amount of a liability or asset to reflect the passage of time, typically for obligations initially recorded at a discounted present value. It is a non-cash expense that aligns the book value with the ultimate settlement amount.
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.
Accumulated depreciation is the total amount of depreciation expense that has been recorded for an asset since it was acquired, reducing its book value over time and impacting taxable income.
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.
Adjusted basis for an S-Corp shareholder represents their investment in the company's stock and debt, crucial for determining the taxability of distributions, deductibility of losses, and gain or loss on sale of stock.
Adjusted Gross Income (AGI) is an individual's gross income minus specific deductions, often referred to as "above-the-line" deductions. It serves as a foundational figure for calculating tax liability and determining eligibility for various tax credits and deductions.
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