Chapter 14: Federal Income Taxation & Real Estate Flashcards
Property Classifications
Tax classifications of real property include:
principal residence property,
personal use property,
unimproved investment property,
property held for the production of income,
property used in a trade or business, or
dealer property.
Gains & Losses
A gain is taxable unless it falls into a specific exception in the tax code.
A loss is only deductible if the tax code specifically allows it to be deducted.
Capital Asset
Property held for personal use or for investment purposes is considered a capital asset.
A capital gain or loss is a gain or loss on the sale of a capital asset.
Initial Basis
The initial basis is the amount of the taxpayer’s original investment in the property.
In other words, it’s how much it cost to acquire the property.
Adjusted Basis
A taxpayer’s adjusted basis in a property equals the initial basis plus capital expenditures, less any depreciation or cost recovery deductions.
Realized
A gain is not taxed until it is realized.
A gain is not realized until the asset is sold or exchanged.
Recognition
A gain is taxed in the year it is realized, unless a provision in the tax code allows recognition of the gain to be deferred.
Installment Sale
An installment sale is any sale in which less than 100% of the sales price is received in the year of the sale.
Installment sale reporting can be used for all types of real estate except dealer property.
Involuntary Conversion
An involuntary conversion occurs when a property is converted to cash without the voluntary action of the owner, as when it is condemned, destroyed, stolen, or lost.
“tax-free” exchange
A tax-free exchange is a transaction in which one piece of investment, income-producing, or business property is traded for a piece of like-kind property.
When like-kind property is exchanged, the taxation of the gain is deferred.
Sale of principle residence
A property seller may exclude up to $250,000 of the gain from the sale of her home if she is filing a single return, or up to $500,000 if she is married and filing a joint tax return.
To qualify for this exclusion, the seller must have both owned and used the property as a principal residence for at least two years during the previous five-year period.
Depreciation Deductions
Depreciation deductions are also called cost recovery deductions.
The taxpayer is permitted to deduct the cost of acquiring an asset over a period of years.
These deductions are allowed for property used in a trade or business and for income property.
Repair Deductions
Repair expenses are funds spent on repairs to keep property in ordinary, efficient operating condition.
Repair expense deductions are allowed for all types of property except principal residences and personal use property.
Real Estate Tax Deductions
General real estate taxes are deductible up to a certain limit, and so are special assessments for maintenance and repairs.
mortgage interest deductions
For most types of property, mortgage interest is fully deductible, although there are limits on the interest deduction for mortgages on personal residences.
