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Intermediate2 hours17 terms

REI Depreciation: Form 4562 Terminology Guide

Explore key terms that might be helpful when navigating IRS Form 4562 for real estate depreciation. This curated collection clarifies commonly referenced concepts, supporting your understanding of essential tax strategies. Use it as a quick reference to confidently approach your investment property tax filings.

Term Collection

1

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
2

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
3

Section 179 Deduction

The Section 179 Deduction allows businesses, including real estate investors operating as active businesses, to deduct the full purchase price of qualifying equipment or software placed in service during the tax year, rather than depreciating it over several years.

Intermediate5 min
4

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
5

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
6

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
7

Tangible Personal Property

Tangible personal property refers to physical assets that can be moved and are not permanently attached to real estate. In real estate investing, understanding this distinction is crucial for tax purposes, depreciation, and property valuation.

Intermediate2-3 min
8

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
9

Real Estate Professional (REP)

Real Estate Professional (REP) status is an IRS designation allowing eligible taxpayers to deduct passive real estate losses against non-passive income, significantly reducing their taxable income.

Advanced7-9 min
10

Amortization

Amortization is the process of paying off a debt over a set period through regular, fixed payments that gradually shift from mostly interest to mostly principal.

Intermediate12-13 min
11

Form 4562: Depreciation and Amortization

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.

Intermediate5 min
12

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
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

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
15

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
16

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
17

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

Common Questions