Income Tax & Computations

Question 1

Liquidity

Answer 1

The degree to which an investment is readily marketable, or convertible to another form of asset. if immediately salable, an investment is liquid; The longer it takes to sell, the more illiquid the investment. Real property is relatively illiquid in comparison with other types of investment

Question 2

Leverage

Answer 2

You may pledge the value of your resource to borrow funds in order to make an investment that is larger than your own resource permits you to do directly. The small resource is used as a level to make a larger investment, thus increases your opportunity to benefit from income, appreciation, and other rewards of investment

Question 3

Non-income Property

Answer 3

A residential property used as the investor’s primary residence. The basic reward, beyond the enjoyment of use, comes in the form of appreciation. There may also be tax benefits, ,depending on how the purchase is financed

Question 4

Income Property

Answer 4

A property owned specifically for the investment rewards it offers. Examples are multi-family residential properties, retail store, industrial properties, and office buildings. Rewards come in ant or all of the forms mentioned earlier: income, appreciation, leverage and tax advantage

Question 5

Opportunity Cost

Answer 5

The return that an investor could earn on capital invested with minimal risk. If the real estate investment, with all its attendant risk, cannot yield a greater return than an investment elsewhere involving less risk, the the opportunity cost is too high for the real estate investment

Question 6

Syndicate

Answer 6

A group of investors who combine resources to buy, develop, and/or operate a property

Question 7

General and Limited Partnerships

Answer 7

General: A syndicate in which all members participate equally in managing the investment and in the profits or losses it generates. The group designates a trustee to hold title in the name of the syndicate

Limited: A syndicate in which a general partner organizes, operates and is generally responsible for the partnership’s interests in the property. Limited partners invest money in the partnership but do not participate in operating the property. There limited partners are passive investors

Question 8

REIT

Answer 8

(Real Estate Investment Trust). Investors buy certificate in the trust, and the trust in turn invests in mortgages or real estate. Investors receive income according to the number of shares they own. A trust must receive at lead 75% of its income from real estate to qualify as a REIT, and if certain other conditions are met, the trust does not have to pay any corporate income tax

Question 9

REMIC

Answer 9

(Real Estate Mortgage Investment Conduit). A kind of partnership entity formed to hold a fixed pool of mortgages that are secured by real property. the entity issues two kinds of interest. Holders of residential interests are treated, for tax purposes, as partners. Holders of regular interests are regarded as owning debt instruments. Income (or loss) received by regular or residential intent holders is treated as portfolio income or loss, and is not included in determining losses from passive activities

Question 10

Cost Recovery

Answer 10

Allows the owner of income property to deduct a portion of the property’s value from gross income each year over the life of the asset. The “life of the asset” and the deductible portion are defined by law

Question 11

Capital Gain

Answer 11

When real estate, whether non-income, is sold, a taxable event occurs. If the sale proceeds exceed the original cost of the investment, subject to some adjustments, there is a capital gain that is subject to tax

Question 12

Passive Activity

Answer 12

Business activities in which the taxpayer does not materially participate. Included are interests in limited partnerships and rental activities.

Question 13

Appreciation

Answer 13

The increase in value of an asset over time

An increase in the value of a property generally owing to economic forces beyond the control of the owner

Question 14

Adjusted Basis

Answer 14

The beginning basis, or cost, of a property plus the cost of capital improvements, minus all depreciation expenses

The basic formula for adjusted is:
Beginning basic+capital improvements-exclusions,creditors or other amounts received/adjeusted basis

Question 15

Gain on Sale

Answer 15

The gain on sale of a primary residence is represented by the basic formula:
Amount realized (net sales proceeds)- adjusted basis/ gain on sale

Gain on sale, if it does not qualify for an exclusion under current tax law, is taxable

Question 16

Cash Flow

Answer 16

The remaining positive or negative amount of income an investment produces after subtracting all operating expenses and debt service from gross income

Question 17

Tax Liablity

Answer 17

The owner’s tax liability on taxable income from the property is based on taxable income rather than cash flow. Taxable income and tax liability are calculated as follows:

Net operating income (NOI)+ reserves-interests expenses-cost recovery expense=taxable income x tax rate= tax liability