1031 exchanges, depreciation, tax benefits, entity taxation, deductions, and tax planning strategies.
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Foundation terms you need to know first (22 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 (35 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.
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).
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 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.
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.
Form 6252 is an IRS tax form used by real estate investors to report income from an installment sale, where at least one payment for the property is received after the tax year of the sale. It allows for the deferral of capital gains tax until payments are actually received.
The profit realized when an asset, such as real estate, is sold for more than its adjusted cost basis. It's a key metric for investors to understand their profitability and tax obligations.
Gain or loss calculation determines the profit or deficit from a real estate investment by comparing the net selling price to the adjusted cost basis, crucial for tax reporting and investment analysis.
The Gift Tax is a federal tax imposed on the transfer of property or money from one individual to another without receiving full consideration in return. It applies to gifts exceeding the annual exclusion limit and is primarily the responsibility of the donor.
Gifting property is the transfer of real estate ownership from one party to another without financial consideration, primarily used for estate planning or family support, with significant tax and legal implications.
The total fair market value of all assets an individual owns or has certain interests in at the time of their death, before any deductions or liabilities are considered. It's crucial for estate planning and determining potential estate tax liabilities.
A holding company is a corporate entity that owns controlling interests in other companies or assets, primarily used in real estate for advanced asset protection, liability segregation, and tax optimization across a portfolio.
The holding period is the length of time an investor owns a real estate asset, directly influencing capital gains taxation, investment strategy, and overall financial returns.
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