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Flashcards in Investing Tax Considerations/Real Estate Deck (15):
1

Holding Periods


- 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


Reporting Losses – the good news


- 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


Reporting Losses – the bad news


- 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


Tax Strategies – Avoidance or Transfer


- 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


Tax Strategies - Deferral

 

- Favoring growth stocks

- 401(k)

- IRA

- Roth IRA

- Annuities

- $2260/year @10% =
$1,000,000 after 40 years

6


Tax Favored Strategies


- Qualified dividends instead of interest

- Government/municipal bonds

- Selling a personal residence

7

Why Real Estate? (Pros)


- 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


Why Real Estate? (Cons)


- 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


Key Factors in Real Estate


- Location and Timing

10


Real Estate Alternatives- Land


Land – use determines value
- Farm
- Recreational property
- Single family homes
- Industrial
- Apartments
- Commercial

11

Real Estate- Assessing the Risk


- 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


REITS


- 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


REITS Risk


Market conditions - Interest in the type of real estate

- Location

- Interest rates

- REIT has liquidity but the underlying property may not

14

REITS Benefits

 

- High current income

- Real estate ownership but without the management hassles

15


REITS - Evaluation


- Degree of diversification

- Amount of debt

- Ideally < 35% of total capitalization

- Experience of management

- Does management have an ownership stake?

- Income and cash flow