Chapter 16 Flashcards
Taxpayer relief act 1997
Taxpayer Relief Act of 1997. This act reduced several federal taxes in the US and had a significant impact on real estate. Subject to certain phasing rules the first thing it did is it took the top marginal long term capital gains rates from what was 28% and brought them down to 20% and for the 15% bracket it actually brought it down to 10%. So that had a major impact on everybody that was selling an asset that was subject to capital gains.
2010 Congress passed the Healthcare and Education Affordability Reconciliation Act which went into effect in January 2013 with the main effect being that there was now a new Medicare surtax that certain real estate investors were subject to. It went into effect January 1st, 2013
and it imposed a 3.8% tax on the net investment income joined filed with adjusted gross income of $250,000, single filers with adjusted gross income of over $200,000.
Tax depreciation
Tax Depreciation – An income deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.
Straight line depreciation
Straight-line Depreciation – A method of calculating the depreciation of an asset which assumes the asset will lose an equal amount of value each year.
Capital Gain
Capital Gain – A profit that results from a the sale of a property where the amount realized from the sale exceed the purchase price.
Capital loss
Capital Loss – The difference between a lower selling price and a higher purchase price, resulting in a financial loss to the seller.
In general we will have 3 classifications of this inco
(1) The first is active income which is earned through salaries or earned in the business activities by actively participating in a business.
2nd classification
(2) The second type of income would be portfolio income. That would include dividends, interests, annuities, as well as royalties
Third type of
3) The third type of income is really the focus of what I want to cover and that is passive income. Passive income is that income that is generated from invested funds and once again as the name implies, the taxpayer has a pass of ownership in that property. So typically you will see passive income associated with rental properties or if a taxpayer has a limited partnership interests in a property. That’s typically the income or loss that will be passed through to those individual
short-term capital gains vs. long-term capital gains. The differentiation between the two
A short term capital gain would be for an asset held for less than 12 months vs. a long term capital gain which would be applicable to an asset held for more than 12 months.
