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Intermediate1 hour18 terms

Declining Balance Depreciation: Key Terms

Explore key terms that might be helpful when understanding the declining balance method for real estate depreciation. This curated collection offers definitions for commonly referenced concepts, supporting your learning journey without aiming for exhaustive coverage. Use it as a quick reference to clarify terminology you may encounter.

Term Collection

1

Depreciable Basis

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.

Intermediate11-15 min
2

Capital Expenditures

Capital Expenditures (CapEx) are significant funds spent by a real estate investor to acquire, upgrade, or extend the useful life of a property, rather than for routine maintenance or operating expenses. These investments enhance the property's value and are typically depreciated over time for tax purposes.

Intermediate14-15 min
3

Real Estate Tax Planning

Real estate tax planning involves strategically managing real estate investments to minimize tax liabilities and maximize after-tax returns, utilizing various deductions, deferrals, and entity structures.

Intermediate5 min
4

Passive Activity Loss

Passive Activity Loss (PAL) rules limit the deduction of losses from passive activities, such as most rental real estate, against non-passive income like wages or portfolio earnings. These losses are typically suspended and carried forward until passive income is generated or the activity is disposed of.

Intermediate13-14 min
5

Real Estate Financial Modeling

Real estate financial modeling is the process of creating a quantitative representation of a real estate investment or development project to forecast its financial performance, assess risk, and support strategic decision-making.

Advanced6-7 min
6

Taxable Income

Taxable income is the portion of an individual's or entity's gross income that is subject to taxation after all allowable deductions, exemptions, and credits have been applied. For real estate investors, it determines the actual income on which taxes are paid.

Intermediate12-13 min
7

Internal Rate of Return

The Internal Rate of Return (IRR) is a sophisticated financial metric used in capital budgeting to estimate the profitability of potential investments, representing the discount rate at which the net present value (NPV) of all cash flows from a particular project equals zero.

Advanced15-18 min
8

Tax Shield

A reduction in taxable income, and thus tax liability, achieved through deductible expenses like depreciation, interest on debt, or operating losses, commonly utilized in real estate to enhance investment returns.

Intermediate2-3 min
9

Depreciation

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.

Intermediate13-14 min
10

1031 Exchange

A 1031 Exchange allows real estate investors to defer capital gains and depreciation recapture taxes when selling an investment property by reinvesting the proceeds into a new "like-kind" investment property within strict IRS timelines.

Advanced15-18 min
11

Straight-Line Depreciation

A method of accounting for the reduction in value of an asset over its useful life by evenly spreading the cost of the asset, minus its salvage value, across each year of its depreciable life. This systematic expensing helps real estate investors reduce taxable income.

Intermediate4-6 min
12

Declining Balance Method

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.

Intermediate4-6 min
13

After-Tax Cash Flow

After-Tax Cash Flow (ATCF) is the net income generated by an investment property after accounting for all operating expenses, debt service payments, and income taxes, providing a true measure of an investor's take-home profit.

Intermediate14-18 min
14

Cost Segregation

Cost Segregation is an IRS-approved tax strategy that reclassifies components of a commercial or residential rental property into shorter depreciation schedules, accelerating tax deductions and boosting immediate cash flow for real estate investors.

Intermediate13-14 min
15

Useful Life

Useful life in real estate refers to the estimated period over which an asset is expected to be economically productive, primarily used for calculating depreciation for tax purposes.

Intermediate2-3 min
16

Depreciation Recapture

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.

Intermediate15-18 min
17

Bonus Depreciation

Bonus depreciation is a tax incentive allowing businesses and real estate investors to immediately deduct a large percentage of the cost of eligible property in the year it's placed in service, accelerating tax savings and boosting cash flow.

Intermediate12-13 min
18

Modified Accelerated Cost Recovery System

The Modified Accelerated Cost Recovery System (MACRS) is the current tax depreciation system used in the United States for most tangible depreciable property, allowing businesses and real estate investors to recover the cost of assets over a specified period.

Advanced5 min

Common Questions