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).
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 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.
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.
Federal income tax is a tax levied by the U.S. government on an individual's or entity's earnings, including wages, salaries, investment income, and rental income from real estate. It operates on a progressive system, meaning higher earners pay a larger percentage of their income in taxes.
The profit realized when an asset, such as real estate, is sold for more than its adjusted cost basis. It's a key metric for investors to understand their profitability and tax obligations.
Income tax is a mandatory payment levied by governments on an individual's or entity's earnings, including salaries, wages, and profits from investments like real estate.
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.
The Internal Revenue Service (IRS) is the U.S. federal agency responsible for collecting taxes and enforcing tax laws, playing a crucial role in real estate investing through income, deductions, and capital gains regulations.
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 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.
The Mortgage Interest Deduction allows homeowners to subtract the interest paid on their home mortgage from their taxable income, reducing their overall tax liability. It applies to qualified acquisition debt on a primary residence and one other qualified home, subject to specific debt limits and itemization requirements.
The tax rate applied to most types of income, including wages, business profits, and short-term capital gains, which is typically higher than long-term capital gains tax rates for real estate investors.
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