Investing Tax Considerations/Real Estate Flashcards
1
Q
Holding Periods
A
- Assets held < or = 1 year are taxed as ordinary income
- Assets held > 1 year are taxed at capital gains rates of 5% or 15%
2
Q
Reporting Losses – the good news
A
- Losses can be used to offset gains
- Losses of up to $3000 can be used to reduce ordinary income
- Losses over $3000 can be carried over
3
Q
Reporting Losses – the bad news
A
- Losses from a wash sale are not permitted
- Wash sale – the sale and repurchase of a stock within 30 days
- While the loss is not tax deductible, it can be added to the basis on the new purchase
4
Q
Tax Strategies – Avoidance or Transfer
A
- Distribute assets to family members
- During life – to a lower tax bracket
- Through your estate – for a stepped up basis
- Create a trust to use your personal gift exemption
- Charitable gifts of appreciated assets
5
Q
Tax Strategies - Deferral
A
- Favoring growth stocks
- 401(k)
- IRA
- Roth IRA
- Annuities
- $2260/year @10% =
$1,000,000 after 40 years
6
Q
Tax Favored Strategies
A
- Qualified dividends instead of interest
- Government/municipal bonds
- Selling a personal residence
7
Q
Why Real Estate? (Pros)
A
- A hedge against inflation
- Leverage enhances your returns
- R.E. will increase because they’re not making more land
- Real estate is safer than the stock market
- A man’s property is his castle
- Real estate is a tax shelter
8
Q
Why Real Estate? (Cons)
A
- Inflation increases interest rates and other costs
- Leverage makes you a slave
- There’s lots of vacant land in the US
- Real estate value is hard to determine – it lacks liquidity
- Buildings codes control you
- Tax laws change and that can hurt you
9
Q
Key Factors in Real Estate
A
- Location and Timing
10
Q
Real Estate Alternatives- Land
A
Land – use determines value
- Farm
- Recreational property
- Single family homes
- Industrial
- Apartments
- Commercial
11
Q
Real Estate- Assessing the Risk
A
- Community: Growing or stable
- Neighborhood:
Vacant shops
Homes for sale - Immediate surroundings:
Condition of buildings
Safety
Financial standards:
Occupancy rate, debt service, operating expenses
12
Q
REITS
A
- Equity
- Mortgage
- Hybrid
- Generally are tax exempt at the trust level as long as they pay out 90% of their income.
- Dividends are usually taxed as ordinary income
13
Q
REITS Risk
A
Market conditions - Interest in the type of real estate
- Location
- Interest rates
- REIT has liquidity but the underlying property may not
14
Q
REITS Benefits
A
- High current income
- Real estate ownership but without the management hassles
15
Q
REITS - Evaluation
A
- Degree of diversification
- Amount of debt
- Ideally < 35% of total capitalization
- Experience of management
- Does management have an ownership stake?
- Income and cash flow
