Lesson 16 - Income Tax in RE Transactions

Question 1

Capital Gain

Answer 1

-A profit that results from the sale of a property where the amount realized from
the sale exceeds the purchase price.

Question 2

Boot

Answer 2

-Cash received in a tax-deferred exchange.

Question 3

Tax Shelter

Answer 3

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

Question 4

Straight-Line Depreciation

Answer 4

• A method of calculating the depreciation of an asset which assumes the asset will lose an equal amount of value each year.
• A residential property is depreciated over a 27.5 year period.
• A commercial property is depreciated over a 39 year period.

Question 5

1031 Exchange

Answer 5

• 45 days to identify a new property

- 180 days to close on a new property

Question 6

Active Income

Answer 6

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

Question 7

Passive Income

Answer 7

-Money earned from investing in a business venture or partnership.
(Example: income earned from a rental property).

Question 8

Portfolio Income

Answer 8

-Money earned from Interest, annuities, dividends, and royalties.
(Example: income earned from investing in stocks, bonds, mutual funds).

Question 9

Adjusted Basis

Answer 9

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

Question 10

Capital Gain

Answer 10

• Capital gain is the profit realized from the sale of any capital investment including real estate.
• Capital gain occurs when an investor sells the property for more than the adjusted basis.

Question 11

Capital Gain Tax Break

Answer 11

• A special exclusion in the IRS law gives home sellers a tax break on capitals gains when they are selling their home.
• Home sellers may be eligible to exclude up to $250,000 if single or up to $500,000 if married of the capital gain on the sale of the residence.

Question 12

Permitted Tax Deductions

Answer 12

The IRS allows homeowners certain deductions on their income taxes.
These include:
1) Property taxes: this applies to property taxes paid on a primary resident and second homes/vacation homes.
2) Mortgage interest

Question 13

Non-Tax Deductible Closing Costs

Answer 13

The following closing costs are NOT tax deductible:

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

Question 14

Property Tax Exemptions

Answer 14

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

– Veterans
– Senior Citizens
– Disabled

The STAR program allows qualified owner-occupied, primary residences to be exempt from school property taxes.