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).
The Declining Balance Method is an accelerated depreciation technique that allows real estate investors to deduct larger portions of an asset's value in its early years, resulting in higher initial tax savings.
A Defined Benefit Plan is a type of employer-sponsored retirement plan that guarantees a specific payout at retirement, typically based on salary and years of service. For real estate investors, self-directed versions allow for significant tax-advantaged contributions to invest in real estate.
A Delaware Statutory Trust (DST) is a legally recognized entity used in real estate to hold title to investment property, primarily utilized by accredited investors seeking passive income and 1031 exchange replacement property solutions.
The depreciable basis is the portion of an investment property's cost, excluding land value, that can be legally deducted over time through depreciation for tax purposes.
Depreciation in real estate is an income tax deduction allowing investors to recover the cost of an income-producing property over its useful life, excluding land value, thereby reducing taxable income.
The Depreciation Cliff describes the abrupt reduction in depreciation tax deductions for real estate investors, typically after accelerated or bonus depreciation periods conclude, leading to a sudden increase in taxable income.
Depreciation recapture is an IRS rule that taxes the gain from the sale of depreciated property at ordinary income tax rates, up to the amount of depreciation previously claimed, ensuring tax benefits are accounted for upon sale.
A depreciation schedule is a detailed accounting document outlining how a real estate asset's value will be expensed over its useful life for tax purposes, allowing investors to reduce taxable income.
A "Disqualified Person" is an individual or entity, as defined by the IRS, legally prohibited from engaging in certain transactions with a self-directed retirement account to prevent self-dealing and conflicts of interest.
The voluntary transfer of real estate ownership from an individual or entity to a qualified charitable organization, often yielding significant income tax deductions and capital gains tax avoidance for the donor.
Double taxation is the taxing of corporate profits at the entity level and again when those profits are distributed to shareholders as dividends, significantly impacting net returns for real estate investors using C-Corporations.
A real estate investment approach that aims to generate both immediate income (cash flow) and long-term capital growth (appreciation) from a single property or portfolio.
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