1031 exchanges, depreciation, tax benefits, entity taxation, deductions, and tax planning strategies.
Master tax strategies & implications with our progressive approach
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).
After-Tax Cash Flow (ATCF) is the net income generated by an investment property after accounting for all operating expenses, debt service payments, and income taxes, providing a true measure of an investor's take-home profit.
After-tax contributions are funds added to a retirement account, such as a 401(k) or IRA, that have already been taxed, offering a pathway for tax-free growth and withdrawals in retirement.
Assessed value is the dollar value assigned to a property by a public tax assessor for the purpose of levying property taxes, typically a percentage of its market value.
Asset location is an investment strategy that focuses on placing different types of assets into specific account types (taxable, tax-deferred, or tax-exempt) to maximize after-tax returns and optimize tax efficiency.
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.
Asset segregation is a legal and financial strategy for real estate investors to separate personal assets from investment assets, or to segregate different investment properties from each other, primarily for liability protection and risk management.
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.
An audit trigger is a specific event, transaction, or financial metric on a tax return that increases the likelihood of an IRS or state tax authority examination for a real estate investor.
Basis allocation is the process of dividing the total acquisition cost of a real estate property among its various components, such as land, building, and personal property, for tax and accounting purposes. This allocation is crucial for calculating depreciation deductions and determining capital gains or losses upon sale.
Bonus depreciation is a tax incentive allowing businesses and real estate investors to immediately deduct a large percentage of the cost of eligible property in the year it's placed in service, accelerating tax savings and boosting cash flow.
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.
A C Corporation is a legal entity separate from its owners, subject to corporate income tax on its profits, and then again to personal income tax when profits are distributed to shareholders as dividends.
Explore complementary areas that build on tax strategies & implications concepts
Personal budgeting, expense tracking, cash flow management, emergency funds, and savings strategies.
Credit scores, debt consolidation, loan management, credit repair, and debt payoff strategies.
Macroeconomic concepts, interest rates, inflation, Federal Reserve policy, and economic cycles.
Wills, trusts, estate taxes, succession planning, beneficiary planning, and wealth preservation.