Investment properties

Question 1

What are the three deductions from taxable income on investment property?

Answer 1

• operating expenses (not reserve for replacement)
• financing expense
• depreciation (key to sheltering income from taxation)

Question 2

What is the tax on gain at time of sale?

Answer 2

You have to pay capital gains tax when you sell an asset, like real estate.

Question 3

What is the installment sale method?

Answer 3

• A way to report the gain (profit) from the sale of certain property over time
• Used when the seller received payments from the buyer in more than one tax year
• Example: you make $20,000 profit from selling a property, but report a $4,000 gain per year over 5 years.

Question 4

When does the installment sale method typically happen?

Answer 4

If the seller is financing (instead of a bank).

Question 5

What is a like-kind exchange?

Answer 5

• A way for investors to defer paying capital gains tax when they sell certain types of property
• Involves reinvesting the proceeds into a similar (‘like-kind’) property
• Also known as a ‘1031 exchange’.