Chapter 17: Income Tax in Real Estate Transactions Flashcards
A method of calculating the depreciation of an asset which assumes the asset will lose an equal amount of value each year.
Straight-Line Depreciation
An income deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.
Tax Depreciation
A profit that results from a the sale of a property where the amount realized from the sale exceed the purchase price.
Capital Gain
The difference between a lower selling price and a higher purchase price, resulting in a financial loss to the seller.
Capital Loss
A major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out.
Basis
When real property is sold at a gain and accelerated depreciation has been claimed, the owner may be required to pay a tax at ordinary (non-accelerated) rates to the extent of the excess accelerate depreciation.
Recaptured Depreciation
The original cost of a property minus depreciation and sales of portions thereof plus allowable additions such as capital improvements and certain carrying costs and assessments. A bookkeeping rather than appraisal term.
*Calculation:
Original Purchase Price
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Capital Improvements
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Depreciation
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Adjusted Basis
Adjusted Basis
Cash received in a tax-deferred exchange.
Boot
*Calculation:
Sales Price
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Selling Costs
=
Net Sales Price
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Adjusted Basis
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Realized GainRealized Gain
Under Section 1031 of the US Internal Revenue Code, the exchange of certain types of property may defer the recognition of capital gains or losses due upon sale, and hence defer any capital gains taxes otherwise due.
Tax-Deferred Exchange
Monetary gain resulting from the increase in the market value of an investment, excluding additions of capital. For example, a house which is sold five years after it was purchased for 50% more than the purchase price.
Appreciation
The net result when income from an investment property is subtracted from the expenses. The result is used to determine the rate of return on an investor’s money.
Cash Flow
Earnings an individual derives from a rental property in which he or she is not actively involved.
Passive Activity Income
Income for which services have been performed.
Active Income
Any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments.
Tax Shelter
