Ch. 22 Investing in Real Estate

Question 1

accelerated cost recovery system (ACRS)

Answer 1

Method of claiming tax deductions for certain property purchased before 1987 in which it was possible to claim greater deductions in the early years of ownership, gradually reducing the amount deducted in each year of the useful life.

Question 2

adjusted basis

Answer 2

The financial interest that the IRS 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.

Question 3

appreciation

Answer 3

holding property primarily for increasing value

Question 4

basis

Answer 4

investor’s initial cost of the real estate

Question 5

boot

Answer 5

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

Question 6

capital gain

Answer 6

defined as the difference between the adjusted basis of property and its net selling price

Question 7

cash flow

Answer 7

total amount of money remaining after all expenditures have been paid

Question 8

depreciation

Answer 8

or cost recovery, allows an investor to recover the cost of income-producing assets through tax deductions over the asset’s useful life

Question 9

equity buildup

Answer 9

results from the addition to the amount paid as a down payment on property of the principal portion of a loan payment, plus any increase in property value due to appreciation

Question 10

exchanges

Answer 10

A transaction in which all or part of the consideration is the transfer of like-kind property

Question 11

income property

Answer 11

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

Question 12

inflation

Answer 12

increase in the amount of money in circulation

Question 13

intrinsic value

Answer 13

result of a person’s individual choices and preferences for a given geographic area.. (the greater the intrinsic value, the more money a property commands on its sale)

Question 14

leverage

Answer 14

use of borrowed money to finance an investment

Question 15

liquidty

Answer 15

refers to how quickly an asset may be converted to cash

Question 16

pyramiding

Answer 16

process of using one property to drive the acquisition of 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. does not pay corporate income tax as long as 95% of its income is distributed to its shareholders. to qualify for an REIT, at least 75% of the trust’s income must come from real estate

Question 18

real estate mortgage investment conduit (REMIC)

Answer 18

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

Question 19

straight-line depreciation

Answer 19

depreciation taken periodically in equal amounts over an asset’s useful life

Question 20

syndicate

Answer 20

A combo of people or firms formed to accomplish a business venture of mutual interest by pooling resources.

Question 21

tax credit

Answer 21

direct reduction in the tax due rather than a deduction from income before tax is computed