Chapter 6- Real Estate Investment and Taxation Flashcards
Rate of return
1) Cap Rate-Rate of return
2) Cash on Return
- Teeter totter example- as one goes up other goes down. (Cap Rate)
Cash flow
Money left over at the end of the bills.
NO1-Debt Service= cash flow
Cash flow divided by cash invested= return
Leverage
Using someone elses money
loan to value ration.
Tax Shelter
Generate more money than tax interest
Inflation Hedge
Pace or out pace inflation
Liquid asset
Something you can readily get… cash, stocks, bonds
Real estate takes longer to get out of.
Risk factor
Money will go away
Investment Vehicles
Ways you can hold title
Types of investment vehicles
1) Sole Proprietorship
2) General Partnership
3) Limited Partnership
4) Regular Corporation (C Corp)
5) “S” Corporation
6) Limited Liability Companies
7) Real Estate Investment Trust (REIT)
8) Securities
Sole Proprietorship
Sole liability 100% Taxation on 1 person Decisions easy to make Have to pay Self Employment taxes No regulatory agencies
General Partnership
Certificate of Partnership 2 or more, Max unlimited Joint and several Taxed 1 time for all partners All partners have say so and liability Register Secretary of State Office-regulate
Limited Partnership
1 or more general partners- rest are silent
Pass through taxes
General get to make decisions
Security exchange commission- Regulates
Blue Sky laws/Blue sky commission- protects public from illegal selling of partnerships.
Regular Corporation ( “C” corporation)
Legal or artificial person.
Takes 1 or more managed by a board of directors.
Double Taxation
Protection from liability- lives on to infinity.
Articles of Inncorporation
Regulated by corperation commission.
“S” Corporation
1-100 Veil of protection Regulated by Corperation Commision. Pass through taxes. Articles of incorporation Articles of organization (LLC) is regulatory agency.
Limited Liability Companies
1 or more individual members- unlimited Need articles Veil of protection Pass through taxes Veil of protection Corperation Commision- regulates
Real Estate Investment Trust
(REIT) Mutual fund 100 investors or more Pasive investment limited to investment with liability Capital gains is taxes Diversification, no cooperate tax Cold lose money invested SEC-Regulates
Securities
Pool of money to invest
allow group investors to pool money and invest in something larger.
No investor control
Licensing- Securities Licenses
Income subject to tax
1) ordinary income or loss- wages
2) Capitol Gains
Ordinary income- wages
W2-wages 1099-Mis. wages- commission 1099-Interest income K1- Partnership income other income
Tax bracket
6 brackets
progressive system 10-39.6%
Capital Gain
Taxable profits from the sale of investment
Computing gain
Paid for- selling for
Basis
Purchase Price
Acquisition cost
closing costs
capital improvements
Home improvements
subtracted depreciation
can depreciate improvements and take off taxes
Calculating gain
adjusted sale-Adjusted Basis= capital gain
Adjusted basis can depreciate for
27.5 years
Short term gain
capital asset- 1 year or less
Long term
excess of 1 year (Holding)
Calculate long term
gain x rate= tax
Calculate short term
gain x rate=tax
Calculating loss
Can deduct
Loss deductibility
$3000 per year
Off-set concept
Can take gain off another property
Carry forward
Carry rest into next year
Gains less than _____ no capital gains
$250,000 single
$500,000 married
Installment sale
Spreads taxes out over time
Only on money as it is recieved
Tax Deferred exchange
To defer taxes
For Investment for Investment
concept of “Boot” Personal property that can balance the exchange-Have to pay taxes on it.
Mortgage relief- taxable
Starker Exchange AKA 1031-delay, close of property.
Starker exchange AKA 1031
1) Designate new property in 45 days- first clock. Name more than need.
2) Completion within 180 days of COE- 2nd clock.
Balance is taxable
Money has to go into qualified intermediary after sale.
Depreciation
Each new owner can depreciate cycle over
Good for 27.5 years
Recoup cost of income property
For Investment properties, needs improvements, commercial.
Tax shelter-Annual amount of depreciation
