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 Dynasty Trust is an irrevocable trust designed to hold assets for multiple generations, often in perpetuity, shielding them from estate taxes, generation-skipping transfer (GST) taxes, and creditors for the benefit of descendants.
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.
Entity formation is the legal process of establishing a business structure, such as an LLC or corporation, to own and operate real estate investments, providing asset protection and tax advantages.
An entity structure defines the legal and tax framework under which a real estate investment business operates, impacting liability protection, taxation, and administrative requirements.
Estate planning is the process of arranging for the management and disposal of a person's assets, including real estate, during their life and after death, to minimize taxes and ensure wishes are met.
A federal and/or state levy on the transfer of a deceased person's net assets to their heirs, calculated on the fair market value of the estate at the time of death or an alternate valuation date, after specific deductions and exemptions. It is a tax on the right to transfer property, not on the right to receive it.
FICA Tax, or Federal Insurance Contributions Act Tax, is a U.S. federal payroll tax that funds Social Security and Medicare programs. It is paid by both employees and employers, and by self-employed individuals as self-employment tax.
A Family Limited Partnership (FLP) is a legal entity used by high-net-worth individuals to transfer assets to younger generations while retaining control, reducing estate taxes through valuation discounts, and providing robust asset protection.
Federal income tax is a tax levied by the U.S. government on an individual's or entity's earnings, including wages, salaries, investment income, and rental income from real estate. It operates on a progressive system, meaning higher earners pay a larger percentage of their income in taxes.
Financial reporting in real estate involves systematically recording, summarizing, and presenting financial transactions and performance data for investment properties. It provides a clear picture of an asset's financial health, crucial for informed decision-making, tax compliance, and communication with stakeholders.
The Five-Year Rule primarily refers to the IRS Section 121 exclusion, allowing homeowners to exclude a significant portion of capital gains from the sale of a primary residence if they've owned and used it for at least two of the five years preceding the sale.
IRS Form 4562 is used by businesses and real estate investors to claim deductions for depreciation and amortization of assets, including Section 179 expense deductions and special depreciation allowances, reducing taxable income.
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