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).
Schedule E is an IRS tax form used by real estate investors to report income and expenses from rental properties, royalties, partnerships, S corporations, estates, and trusts.
Section 1231 property refers to depreciable real or personal property used in a trade or business and held for more than one year, offering favorable tax treatment by allowing net gains to be taxed as long-term capital gains and net losses as ordinary losses.
Section 1250 property refers to depreciable real property, such as buildings and their structural components, subject to specific depreciation recapture rules upon sale, which can convert a portion of capital gains into ordinary income.
The Section 179 Deduction allows businesses, including real estate investors operating as active businesses, to deduct the full purchase price of qualifying equipment or software placed in service during the tax year, rather than depreciating it over several years.
A Self-Directed 401(k) is a retirement plan for self-employed individuals and small business owners with no full-time employees, allowing them to invest retirement funds in a broader range of assets, including real estate, private equity, and other alternative investments, beyond traditional stocks and bonds.
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).
Self-Employment Tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves, such as independent contractors, freelancers, and real estate investors operating as sole proprietors or partners.
A Series LLC is a legal entity structure allowing for multiple, distinct "series" within a single LLC, each with segregated assets and liabilities, offering enhanced asset protection and administrative efficiency for multi-asset portfolios.
Short-term capital gains are profits from the sale of an asset, such as real estate, held for one year or less, and are taxed at an investor's ordinary income tax rate.
The Spousal REPS Strategy allows married couples filing jointly to qualify for Real Estate Professional Status (REPS) if one spouse materially participates in real estate activities, enabling the deduction of passive real estate losses against active income.
State tax laws for real estate are specific regulations enacted by individual states that govern property ownership, transactions, and income generated from real estate investments within their borders, significantly impacting investor profitability and compliance.
A critical tax provision that adjusts the cost basis of an inherited asset to its fair market value on the date of the decedent's death, effectively eliminating capital gains tax on appreciation that occurred during the decedent's lifetime.
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