Intermediate terms

Essential Real Estate Tax Strategy Terms

This curated collection includes key terms that might be helpful when exploring real estate taxation and tax strategies. It covers crucial concepts related to taxes, deductions, and various strategies investors use to maximize returns by minimizing their tax burden. These terms were selected based on common questions and areas where investors often need clarity.

Learning Path

Tax Burden

Tax burden in real estate refers to the total amount of taxes an investor is responsible for, including property, income, capital gains, and transfer taxes, which directly impact an investment's profitability and cash flow.

Beginner13-14 min

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

Qualified Opportunity Fund

A Qualified Opportunity Fund (QOF) is an investment vehicle that allows investors to defer, reduce, and potentially eliminate capital gains taxes by reinvesting those gains into designated low-income urban and rural communities called Opportunity Zones.

Advanced13-15 min

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

Capital Gains Tax

Capital Gains Tax is a tax on the profit realized from the sale of a non-inventory asset, such as real estate, calculated as the difference between the selling price and the adjusted cost basis.

Intermediate13-14 min

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

Material Participation

Material Participation refers to IRS criteria determining an individual's active involvement in a business or rental activity, crucial for deducting real estate losses against ordinary income.

Intermediate13 min

Mortgage Interest Deduction

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.

Beginner12-16 min

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

Tax Deferral

Tax deferral is the legal postponement of paying taxes on investment gains or income until a future date, allowing capital to remain invested and grow through compounding.

Intermediate13-16 min

Short-Term Capital Gains

Short-term capital gains are profits from the sale of an asset, such as real estate, held for one year or less, and are taxed at an investor's ordinary income tax rate.

Intermediate12-15 min

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

Real Estate Professional Status

Real Estate Professional Status (REPS) is an IRS designation allowing qualifying taxpayers to treat rental real estate activities as non-passive, enabling them to deduct passive losses against non-passive income and potentially reduce their taxable income significantly.

Advanced12-15 min

Real Estate Tax Deductions

Real estate tax deductions are IRS-approved expenses that investors can subtract from their gross rental income, reducing taxable income and overall tax liability.

Intermediate14-15 min

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

At-Risk Rules

The At-Risk Rules (IRC Section 465) limit the amount of deductible losses from an investment activity to the amount an investor is economically exposed to lose, including cash, property basis, and certain recourse or qualified non-recourse debt.

Advanced14 min

Property Tax

Property tax is a recurring tax levied by local governments on real estate, calculated based on the property's assessed value, and used to fund public services. It is a significant ongoing expense for property owners and investors.

Beginner15-18 min

Adjusted Basis

The adjusted basis is the original cost of an asset, such as real estate, plus the cost of any capital improvements, minus any depreciation deductions and certain other adjustments. It's crucial for calculating taxable gains or losses upon sale.

Intermediate13-14 min

Qualified Business Income (QBI) Deduction

The Qualified Business Income (QBI) Deduction, under Section 199A, allows eligible owners of pass-through entities and self-employed individuals to deduct up to 20% of their qualified business income, subject to various income, W-2 wage, and qualified property limitations.

Advanced12-15 min

Long-Term Capital Gains

Long-Term Capital Gains are profits from selling an asset held for more than one year, typically taxed at lower, preferential rates compared to ordinary income, making them a key consideration for real estate investors.

Intermediate12-15 min

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