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 legal provision that allows homeowners to protect a portion of their primary residence's value from property taxes and, in many cases, from creditors, thereby reducing their annual tax burden and enhancing financial security.
IRA real estate investing involves using a self-directed Individual Retirement Account (SDIRA) to purchase and hold real estate assets, allowing investors to defer or avoid taxes on investment gains.
An IRA rollover is the process of moving funds from one retirement account to another, typically from an employer-sponsored plan to an Individual Retirement Account (IRA), without incurring immediate taxes or penalties.
IRS Compliance for real estate investors involves adhering to all tax laws, regulations, and reporting requirements set by the Internal Revenue Service to ensure proper taxation of real estate income and expenses.
IRS Form 4797 is used by businesses and individuals to report gains and losses from the sale or exchange of business property, including real estate, and involuntary conversions, primarily addressing depreciation recapture.
IRS Form 843, officially titled 'Claim for Refund and Request for Abatement,' is used by taxpayers to request a refund of overpaid taxes, interest, penalties, or additions to tax, or to request the abatement of an unpaid assessment.
A non-cash payment for goods, services, or debt, often involving assets, property, or services instead of monetary exchange. It's common in real estate for partnerships, property exchanges, or compensation.
An Individual Retirement Account (IRA) is a tax-advantaged savings plan designed to help individuals save for retirement, offering benefits like tax-deferred growth or tax-free withdrawals.
Inheritance tax is a state-level tax levied on the value of assets inherited by beneficiaries from a deceased person's estate, paid by the recipient rather than the estate itself.
The Installment Method is a tax deferral strategy allowing sellers of real estate to spread the recognition of capital gains over the period in which payments are received, rather than recognizing the entire gain in the year of sale.
An installment sale is a transaction where a seller finances the buyer's purchase of property, receiving at least one payment after the tax year of the sale, thereby deferring capital gains taxes over time.
Interest abatement is a reduction or elimination of interest payments on a loan, often granted by a lender or government entity as an incentive for specific real estate development or economic activities.
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