Income Tax in Real Estate Transactions Flashcards

1
Q

Active income – Money earned through…

A

salaries or in a business in which the taxpayer actively participates.
(Example: a typical full-time job).

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2
Q

Passive income – Money earned from…

A

investing in a business venture or partnership.

Example: income earned from a rental property

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3
Q

Portfolio income – Money earned from…

A

Interest, annuities, dividends, and royalties.

Example: income earned from investing in stocks, bonds, mutual funds

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4
Q

Tax shelters are any method of reducing…

A

taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments.

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5
Q

One of the advantages that real estate offers to investors is a…

A

tax shelter, which allows investors to only pay income taxes on a portion of their properties cash flow (or pay no taxes at all).

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6
Q

A 1031 tax-deferred exchange allows an individual to…

A

defer capital gains taxes on real estate bought and sold for investment purposes.

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7
Q

In order to qualify for a tax-deferred exchange (1031 Exchange), the properties must be

A

“like-kind”.

Commercial properties must be exchanged for other commercial properties.
This may be an office building for a shopping mall, an apartment building for a tract of land, or an office building for an apartment building.

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8
Q

Depreciation is a…

A

paper loss required for estimated wear, tear, and obsolescence of a property.

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9
Q

The IRS allows real estate investors to…

A

depreciate their investment properties.

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10
Q

Residential buildings and improvements are depreciable over…

A

27.5 years using straight-line depreciation.

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11
Q

Commercial buildings and improvements depreciate over…

A

39 years using straight-line depreciation.

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12
Q

Straight-line depreciation means that the…

A

portion allocated to the building is divided by 27.5 (Residential) or 39 (commercial) to determine an equal amount of depreciation allowance each year.

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13
Q

Adjusted basis is the…

A

original cost or other basis plus certain additions and minus certain deductions such as depreciation and casualty losses.

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14
Q

Capital gain is the…

A

profit realized from the sale of any capital investment including real estate.

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15
Q

Capital gain occurs when an…

A

investor sells the property for more than the adjusted basis.

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16
Q

Capital Gain Tax Break is a special exclusion in the IRS law gives…

A

home sellers a tax break on capitals gains when they are selling their home.

17
Q

Home sellers may be eligible to exclude up to…

A

$250,000 if single or up to $500,000 if married of the capital gain on the sale of the residence.

18
Q

The IRS allows homeowners certain deductions on their income taxes. These include:

A

1) Property taxes: this applies to property taxes paid on a primary resident and second homes/vacation homes.
2) Mortgage interest

19
Q

The following closing costs are NOT tax deductible:

A

1) Appraisal fees
2) Notary fees
3) Preparation costs for the mortgage
4) Mortgage insurance premiums
5) VA funding fees

20
Q

Certain qualified individuals may be eligible for a partial exemption in their property taxes. These include:

A

– Veterans
– Senior Citizens
– Disabled

21
Q

The STAR program allows qualified…

A

owner-occupied, primary residences to be exempt from school property taxes.