1031 exchanges, depreciation, tax benefits, entity taxation, deductions, and tax planning strategies.
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Foundation terms you need to know first (22 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 (35 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.
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).
Revaluation surplus is an equity account on a company's balance sheet, representing the unrealized gain arising from the revaluation of an asset, typically property, plant, and equipment, to its fair value, exceeding its historical cost or previous revalued amount.
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.
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.
An Asset Retirement Obligation (ARO) is a legal obligation associated with the retirement of a tangible long-lived asset, recognized as a liability in financial statements at its fair value, typically the present value of estimated future costs.
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.
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.
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.
A Charitable Remainder Trust (CRT) is an irrevocable trust that provides an income stream to the grantor or other non-charitable beneficiaries for a specified term, with the remaining assets distributed to a qualified charity upon the trust's termination.
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.
Debt recycling is an advanced financial strategy where non-tax-deductible debt, typically a primary home mortgage, is converted into tax-deductible debt by using the equity to acquire income-producing assets.
A Dynasty Trust is an irrevocable trust designed to hold assets for multiple generations, often in perpetuity, shielding them from estate taxes, generation-skipping transfer (GST) taxes, and creditors for the benefit of descendants.
A federal and/or state levy on the transfer of a deceased person's net assets to their heirs, calculated on the fair market value of the estate at the time of death or an alternate valuation date, after specific deductions and exemptions. It is a tax on the right to transfer property, not on the right to receive it.
A Family Limited Partnership (FLP) is a legal entity used by high-net-worth individuals to transfer assets to younger generations while retaining control, reducing estate taxes through valuation discounts, and providing robust asset protection.
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