Chapter 18 Flashcards
Which entity provides limited liability protection, separating personal assets from business debts for real estate investors?
Limited Liability Company (LLC)
tax
liability
the amount of
tax owed to the government
based on taxable income,
deductions, and credits.
syndicate
group of
individuals or entities that
come together to pool
resources and invest in real
estate or other ventures.
REMIC (Real
Estate
Mortgage
Investment
Conduit)
complex type of
investment vehicle that holds
a pool of mortgage loans and
issues multiple classes of
securities backed by the cash
flows from the underlying
mortgages.
REIT (Real
Estate
Investment
Trust)
company that
owns, operates, or finances
income-generating real
estate and allows investors
to invest in real estate
without directly owning
properties
passive
activity
an
investment in which the
investor does not materially
participate in the
management or operation of
the business
opportunity
cost
the
potential benefit that is
forgone when one alternative
is chosen over another.
non-income
property
real
estate that does not generate
rental income
liquidity
the ease
with which an asset can be
converted into cash without
affecting its market price
leverage
the use of
borrowed capital to increase
the potential return on
investment.
income
property
real
estate that generates rental
income from tenants
general and
limited
partnerships
A general partnership consists
of partners who share
management responsibilities
and liability for the
partnership’s debts. A limited
partnership has both general
partners who manage the
business and limited partners
who have limited liability and
no management authority.
gain
on sale
the profit
realized from the sale of an
asset, such as real estate,
after subtracting the adjusted
basis and selling expenses.
cost
recovery
also known as
depreciation, is the process
of deducting the cost of a
tangible asset over its useful
life for tax purposes.
cash
flow
the net income
generated by an investment
property after subtracting
operating expenses,
mortgage payments, and
vacancy losses
capital
gain
the profit
realized from the sale of an
asset, such as real estate or
stocks, that exceeds its
purchase price.
appreciation
the increase
in the value of an asset over
time
adjusted
basis
the original
cost of an asset, such as real
estate, adjusted for
depreciation, capital
improvements, and other
factors.
An individual buys a small office building as an investment and participates actively in the management and operation of the building. This is an example of
direct investment
A real estate investment can take a long period of time to sell. For the investor, this means that real estate is
relatively illiquid
A homeowner sold her house and had net proceeds of $191,000. Her adjusted basis in the home was $176,000. She immediately bought another house for $200,000. What was her capital gain?
$15,000
One way investors measure the yield of an investment is by
dividing cash flow by the investor’s equity
A homeowner paid $285,000 for a house three years ago. The house sells today for $339,000. How much has the property appreciated?
19%
(1) subtracting the estimated current market value from the price originally paid (339,000 - 285,000 = 54,000) and (2) dividing the result by the original price (54,000 / 285,000 = . 19 or 19%)
Bill Holdfast owns a small retail property that he inherited from his father. There are no mortgages or interest expenses connected with the property. Bill takes an annual cost recovery expense of $5,000. The property has a monthly gross income of $1,500 and monthly operating expenses of $500. Bill’s taxable income from this property will be taxed at a rate of 24%. What is the tax liability for the year?
1,680
Annual gross operating income ($1,500 x 12 = $18,000) - annual operating expenses ($500 x 12 = $6,000) = annual net operating income ( $12,000); annual net operating income ($12,000) - cost recovery expense ($5,000) = taxable income ($7,000); taxable income ($7,000) x tax rate (24%) = tax liability ($1,680)
