Chapter 15Federal Income

Taxation and BasicPrinciples of RealEstate Investment

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IN THIS CHAPTER

• Real estate licensees should recommend that buyers and sellers seek this specialized expertise.

• The fundamentals of tax implications in the ownership and sale of a principal residence and business and investment property.

• Special tax benefits provided to owners and sellers.

• Basic real estate investment principles2010©Cengage Learning. All Rights Reserved.

Depreciation

• Deductible allowance from net income of property when arriving at taxable income.

• Useful life for residential property is 27.5 years and 31.5 years for nonresidential property.

• No depreciation allowed for land.

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Passive Income

• Any tax losses from investment property are allowable only to offset income from passive activities.

• Taxpayers may shelter up to $25,000 of passive income or active income with adjusted gross income of less than $100,000 who actively manage their own rental property.

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INTEREST AND TAXES

The tax-deductible expenses of home ownership are – mortgage interest – ad valorem real property taxes

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Sales of Principal Residences

• Married homeowners may exclude from taxation up to $500,000 of the gain from the sale of a principal residence.

• Single homeowners are allowed to exclude up to $250,000.

• the taxpayer must have owned and occupied the home as a principal residence for at least two of the last five years.

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Capital Gains

• A gain or loss on the sale of an asset is not recognized for income tax purposes until you dispose of the asset.

• When gain becomes taxable it may be eligible for the preferential capital gains tax rates depending upon the length of ownership.

• Professionals should be consulted to determine the exact date and rate for any transaction.

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Estate and Gift Taxation

• A gift tax is imposed on lifetime transfers by gift.

• An estate tax is imposed on transfers at death.

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Like-Kind (Section 1031) Exchanges

• The properties must be like-kind.• No boot received or taxable.• Basis of property are exchanged.• The property for exchange must be

identified in writing within 45 days. • The closing on the property must be

within 180 days.• No tax due at time of exchange – no sale.

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Self-Employed Persons

• Home Office Deductions• Health Insurance Deductions• Business Expenses

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REAL ESTATE INVESTMENT

• Capital appreciation• Cash flow• Tax advantages• Tax deferral• Time value of money– A dollar received today is more

valuable than a dollar received next year.

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Accelerated depreciationbasisbootcapital gaindeferred gain rolloverdepreciationInvoluntary conversionlike-kind property (Section 1031) exchangesmultiple exchangeopportunity costpassive incomeproration of the universal exclusionrealized gainStarker exchange/Starker truststraight-line depreciationtax-deductible expensesTaxpayer Relief Act of 1997universal exclusionunlike-kind property

CHAPTER TERMINOLOGY REVIEW

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