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).
Modified Adjusted Gross Income (MAGI) is a crucial metric derived from Adjusted Gross Income (AGI) by adding back certain deductions and exclusions, primarily used to determine eligibility for various tax credits, deductions, and investment-related tax rules.
A Mortgage Credit Certificate (MCC) is a federal tax credit that allows eligible first-time homebuyers to claim a portion of their annual mortgage interest as a direct dollar-for-dollar reduction of their federal income tax liability.
The Mortgage Interest Deduction allows homeowners to subtract the interest paid on their home mortgage from their taxable income, reducing their overall tax liability. It applies to qualified acquisition debt on a primary residence and one other qualified home, subject to specific debt limits and itemization requirements.
Net Earnings from Self-Employment (NESE) represents the profit or loss derived from a trade or business operated by an individual, partnership, or LLC, which is used to calculate the self-employment tax for Social Security and Medicare contributions.
The Net Investment Income Tax (NIIT) is a 3.8% tax on certain net investment income of individuals, estates, and trusts whose income exceeds statutory thresholds, primarily impacting passive investors.
Non-cash expenses are accounting entries that reduce a property's taxable income without involving an actual outflow of cash, primarily benefiting real estate investors through tax deductions.
A contribution to a retirement account or investment that does not reduce current taxable income but may offer tax-deferred growth or tax-free withdrawals in the future, often used for backdoor Roth IRA conversions.
A non-monetary transaction in real estate involves the exchange of assets or services without the direct use of cash, often for strategic, tax-deferred, or operational benefits. These transactions require careful valuation and adherence to specific legal and tax regulations.
Opportunity Zone Investing is a tax-advantaged strategy allowing investors to defer, reduce, and potentially eliminate capital gains taxes by reinvesting eligible gains into Qualified Opportunity Funds (QOFs) that develop or operate businesses in designated low-income communities.
Opportunity Zones are a federal program offering tax incentives for investors who reinvest capital gains into designated economically distressed communities through Qualified Opportunity Funds (QOFs), aiming to spur economic development and job creation.
Ordinary income refers to any type of income that is taxed at regular income tax rates, as opposed to preferential rates like those for long-term capital gains. In real estate, this commonly includes rental income, active business profits, and interest income.
The tax rate applied to most types of income, including wages, business profits, and short-term capital gains, which is typically higher than long-term capital gains tax rates for real estate investors.
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