Chapter 19: Real Estate Investment

Question 1

What is cash flow (net spendable)?

Answer 1

refers to the number of dollars remaining each year after collecting rents and paying operating expenses and mortgage payments

Question 2

What is cash on cash?

Answer 2

The cash flow property produces in a year divided by the amount of cash required to buy the property.

Question 3

What is a tax shelter?

Answer 3

Broad definition:
Any tax deductible expense generated by an investment property

Narrow definition:
Depreciation a tax payer can report as a taxable deduction against other income

Question 4

What is the minimum depreciation period for residential vs. commercial property?

Answer 4

Residential: 27.5 years
Commercial: 39 years

Question 5

What is straight line depreciation?

Answer 5

Is calculated by taking the total amount of depreciation and dividing by the number of years

Question 6

What is a capital gains tax?

Answer 6

A tax paid on an appreciated asset

Question 7

How do you determine capital gain in real estate?

Answer 7

Subtract the adjusted basis from the adjusted sales price

Question 8

What is an exchange?

Answer 8

1. Exchanging one property for another

2. For exchange to be tax deferred it must be of like kind

Question 9

What is a boot?

Answer 9

Any additional capital or personal property included with the transactions to even out the exchange

Question 10

What is leverage?

Answer 10

The impact that borrowed funds have on investment returns

Question 11

What is FIRPTA (Foreign Investment in Real Property Tax Act)?

Answer 11

It authorized the United States to tax foreign persons on dispositions of U.S. real property interests.