23. Introduction to the Real Estate Investment

Question 1

ADJUSTED BASIS

Answer 1

The amount of any depreciation claimed as a tax deduction subtracted from the basis. See basis.

Question 2

APPRECIATION

Answer 2

An increase in the worth or value of a property due to economic or related causes, which may prove to be either temporary or permanent; opposite of depreciation.

Question 3

BASIS

Answer 3

The financial interest that the Internal Revenue Service attributes to an owner of an investment property for the purpose of determining annual depreciation and gain or loss on the sale of the asset. If a property was acquired by purchase, the owner’s basis is the cost of the property plus the value of any capital expenditures for improvements to the property, minus any depreciation allowable or actually taken. This new basis is called the adjusted basis.

Question 4

BOOT

Answer 4

Money or property given to make up any difference in value or equity between two properties in an exchange.

Question 5

CAPITAL GAIN

Answer 5

Profit earned from the sale of an asset.

Question 6

CASH FLOW

Answer 6

The net spendable income from an investment, determined by deducting all operating and fixed expenses from the gross income. When expenses exceed income, a negative cash flow results.

Question 7

COST RECOVERY

Answer 7

An Internal Revenue Service term for depreciation.

Question 8

DEPRECIATION

Answer 8

(1) In appraisal, a loss of value in property due to any cause, including physical deterioration, functional obsolescence, and external obsolescence. (2) In real estate investment, an expense deduction for tax purposes taken over the period of ownership of income property.

Question 9

EQUITY BUILDUP

Answer 9

The portion of the loan payment directed toward the principal rather than the interest, plus any gain in property value due to appreciation.

Question 10

EXCHANGE

Answer 10

A transaction in which all or part of the consideration is the transfer of like-kind property (such as real estate for real estate).

Question 11

INCOME PROPERTY

Answer 11

Property held for current income as well as potential profit upon its sale.

Question 12

INFLATION

Answer 12

The gradual reduction of the purchasing power of the dollar, usually related directly to the increases in the money supply by the federal government.

Question 13

INTRINSIC VALUE

Answer 13

An appraisal term referring to the value created by a person’s personal prefer emcees for a particular type of property.

Question 14

LEVERAGE

Answer 14

The use of borrowed money to finance an investment.

Question 15

LIQUIDITY

Answer 15

The ability to sell an asset and convert it into cash, at a price close to its true value, in a short period of time.

Question 16

PYRAMIDING

Answer 16

The process of acquiring additional properties by refinancing properties already owned and investing the loan proceeds in additional properties.

Question 17

REAL ESTATE INVESTMENT TRUST (REIT)

Answer 17

Trust ownership of real estate by a group of individuals who purchase certificates of ownership in the trust, which in turn invests the money in real property and distributes the profits back to the investors free of corporate income tax.

Question 18

REAL ESTATE MORTGAGE INVESTMENT CONDUIT (REMIC)

Answer 18

A tax entity that issues multiple classes of investor interests (securities) backed by a pool of mortgages.

Question 19

SYNDICATE

Answer 19

A combination of people or firms formed to accomplish a business venture of mutual interest by pooling resources. In a real estate investment syndicate, the parties own and/or develop property, with the main profit generally arising from the sale of the property.