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.
The Qualified Business Income (QBI) Deduction, under Section 199A, allows eligible owners of pass-through entities and self-employed individuals to deduct up to 20% of their qualified business income, subject to various income, W-2 wage, and qualified property limitations.
A Qualified First-Time Homebuyer Distribution allows individuals to withdraw up to $10,000 from their IRA without the usual 10% early withdrawal penalty, specifically for the purchase, construction, or reconstruction of a first home.
A Qualified Intermediary (QI) is a neutral third party that facilitates a 1031 exchange by holding sale proceeds from a relinquished property and using them to acquire a replacement property, preventing the taxpayer from having constructive receipt of funds and ensuring tax deferral.
Qualified mortgage interest is the interest paid on a loan secured by your main home or a second home that may be deductible from your taxable income, subject to specific IRS limits and rules.
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.
Real estate barter is the direct exchange of one property for another without the use of cash or with minimal cash (known as 'boot') to equalize values, often employed to defer capital gains taxes.
A real estate exit strategy is a predefined plan for how an investor will liquidate or conclude their involvement with a property, aiming to realize profits, recover capital, or mitigate losses.
Real Estate Professional (REP) status is an IRS designation allowing eligible taxpayers to deduct passive real estate losses against non-passive income, significantly reducing their taxable income.
Real Estate Professional Status (REPS) is an IRS designation allowing qualifying taxpayers to treat rental real estate activities as non-passive, enabling them to deduct passive losses against non-passive income and potentially reduce their taxable income significantly.
Real estate retirement planning involves strategically incorporating real estate investments into a broader retirement portfolio to generate income, build wealth, and achieve long-term financial security.
Real estate tax credits are direct dollar-for-dollar reductions in federal or state income tax liability, designed to incentivize specific real estate activities such as affordable housing development, historic preservation, or renewable energy installations.
Real estate tax deductions are IRS-approved expenses that investors can subtract from their gross rental income, reducing taxable income and overall tax liability.
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