Federal Income Taxation and Real Estate Flashcards
What is a personal use property?
Second home. Property other than the principal residence that is owned for personal use.
Are losses on a personal residence tax deductible?
No. Taxpayers cannot deduct losses on the sale of principal residences or personal use properties.
What is a Tax Basis?
Basis: The amount of the owner’s original investment in the property; what it cost to acquire the property, which may include closing costs, as well as the purchase price.
Also called initial basis. Basis can be increased through capital improvements and decreased
through depreciation.
Initial basis
+ Capital expenditures
– Depreciation
= Adjusted basis
How is net gain/loss calcualted?
Net sales price (“amount realized” in tax code)
- properties adjusted basis
= net gain/loss
Gain or loss is not realized until the property is sold. It is taxed when it’s recognized, and this is usually the same year it’s realized unless the tax code allows deferral to a later year.
What is an installment sale? How is it taxed?
It’s a sale where less than 100% is received in the year of the sale. Seller financed sales, for example.
Taxes are paid only on the portion of the profit received each year, the gain is prorated over the term of the installment contract.
What is dealer property?
Property that is held for sale to customers rather than long-term. Lots in newly developed subdivisions are dealer-owned properties.
What is a tax-free exchange?
Section 1031 exchange. If unimproved property, income property or property used in trade/business is exchanged for like-kind, the recognition of any realized gain will be deferred indefinitely.
Personal property (primary or secondary) and dealer properties are exempt.
What is a “Boot”?
Personal property (can be $$) given to balance the exchange when two properties of unequal value are exchanged.
What are the requirements of a 1031 exchange?
Taxpayer has 45 days to identify the replacement property and 180 days after the closing on the initial property to close on the replacement.
Is the sale of a principal residence taxable?
Only if the gain is over $250k for an individual or $500k for a married couple.
What is “straight line depreciation”?
A deduction that assumes the same amount of depreciation happens each year. Residential property is depreciated over 27.5 years and commercial over 39.
Allowable depreciation is subtracted from the property’s basis on sale, whether or not the deduction was taken.
Are property taxes deductable?
Yes, general real estate taxes are 100% deductible. Special assessments for specific repairs or improvements are not.
Is mortgage interest deductible?
Yes, 100% on mortgage debt used to buy, build or improve a first or second residence up to $750k. Points are also deductible.
