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 replacement property is a real estate asset acquired in a 1031 exchange to defer capital gains taxes on the sale of a previous investment property, provided it meets specific "like-kind" and value requirements.
A Required Minimum Distribution (RMD) is the minimum amount that a retirement plan account owner must withdraw annually once they reach a certain age, typically 73, to avoid significant tax penalties.
The Residency Rule, also known as the Section 121 Exclusion, allows eligible homeowners to exclude a significant portion of capital gains from the sale of their primary residence from federal income tax.
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 Rollover IRA is an Individual Retirement Account used to transfer funds from an employer-sponsored retirement plan, such as a 401(k) or 403(b), into an IRA, typically without incurring immediate taxes or penalties.
A financial strategy involving moving pre-tax retirement funds from a traditional IRA or 401(k) into a Roth IRA. This conversion incurs taxes on the converted amount in the year of conversion, but allows for tax-free withdrawals in retirement, provided certain conditions are met.
Roth IRA tax-free withdrawals allow eligible individuals to access their contributions and earnings completely free of federal income tax in retirement, provided specific age and holding period requirements are met. This makes them a powerful tool for tax-efficient wealth accumulation, especially for real estate investors.
An S Corporation is a federal tax designation for eligible domestic corporations that allows profits and losses to be passed directly to the owners' personal income without being subject to corporate tax rates, avoiding double taxation.
An S-Corp distribution refers to the disbursement of profits or assets from an S corporation to its shareholders, typically tax-free up to the shareholder's basis and the Accumulated Adjustments Account (AAA), with specific tax implications for real estate investors.
S-Corp distributions are payments of profits from an S corporation to its shareholders, which are generally tax-free up to the shareholder's adjusted basis in the company.
An S-Corporation election is a tax designation allowing a corporation or LLC to pass corporate income, losses, deductions, and credits through to its shareholders' personal income without being subject to corporate tax rates, thereby avoiding double taxation.
The SALT (State and Local Tax) deduction limit is a federal tax provision capping the amount of state and local taxes that can be deducted from federal taxable income at $10,000 per household, significantly impacting real estate investors in high-tax states.
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