Section 11: Investing, Taxes, and Bankruptcy Flashcards
1
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Investing in Real Estate:
* Investing could be for short term or long term (buy and hold, vs buy and sell).
* Both strategies have risks and rewards and their own __________ implications to the investor.
A
Tax
2
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Investing in Real Estate:
* __________:
These could be appreciation, tax advantages and potential gains.
A
Advantages
3
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Investing in Real Estate:
* __________:
These could be cash liquidity problems, risky and potential loss of investment.
A
Disadvantages
4
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Investing in Real Estate:
IMPORTANT: __________:
Investors look for rental income and long-term appreciation.
A
Long Term Gains
5
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Investing in Real Estate:
IMPORTANT: __________: Investors are looking for gains in a short time frame.
A
Short Term Gains
6
Q
INVESTMENT, TAX, AND BANKRUPTCY:
__________:
* These types of investors in the short game will usually look for opportunities in the real estate markets.
* These investors must analyze risk vs rewards and effects on their liquidity.
A
Short Term Investing
7
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Short Term Investing:
o Short term investors keep their cash moving, thus need to be __________.
* There is typically a higher degree of risk when working in volatile markets.
* The feds call this speculation is what many people blame on the recession of 2007.
A
Liquid
8
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Short Term Investing:
__________:
A form of gambling where appreciation is the outcomes’ goal.
▪EXAMPLE: An investor looking to flip a home think that within a short timeframe he expects to earn a profit after the acquisition, rehab and sale.
A
Speculation
9
Q
INVESTMENT, TAX, AND BANKRUPTCY:
__________:
* These types of investors will usually expect a gain on their money over time from both the expectation of appreciation and the increases in rent, for real estate.
A
Long Term Investing
10
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Long Term Investing:
* Any Asset can appreciate or depreciate in __________.
A
Value
11
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Long Term Investing:
o __________:
Tangible or Intangible items that have value.
▪ These could be stocks, real estate, oil rights, patents, royalties etc.
A
Asset
12
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Long Term Investing:
* Any asset can appreciate or depreciate in value:
o __________:
Rise in an assets value based on outside economic factors.
A
Appreciation
13
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Long Term Investing:
▪ Real estate is known to appreciate at a value of roughly __________% per year.
* This is a HISTORICAL analysis and as such, many investors feel real estate is a safe investment strategy for long term appreciation.
A
%3
14
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Long Term Investing:
* Any asset can appreciate or depreciate in value:
o __________ = Fall in an assets value based on outside economic factors
▪ Historically however, the fact is real estate values do in fact appreciate, but also depreciate, both in a somewhat cyclical cycle.
A
Depreciation
15
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
As a general rule, historically properties have increased in value at a rate of _____% per year.
A
3%
16
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Long Term Investing:
* Any asset can appreciate or depreciate in value:
* Another advantage of long-term investing is by leveraging, investors hope to see an
increase in value based on economic factors:
1.
2.
3.
4.
A
- Demand
- Utility
- Scarcity
- Transferability
17
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Long Term Investing:
* Any asset can appreciate or depreciate in value:
* ________:
This is a method for investors to expand their portfolio by getting mortgages, thus having liquidity to buy more properties and more rental income / appreciation.
A
Leveraging
18
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Long Term Investing:
* Any asset can appreciate or depreciate in value:
o ________:
Borrowing money instead of using your own to acquire property.
A
Leverage
19
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Long Term Investing:
* Any asset can appreciate or depreciate in value:
o ________:
How quickly an asset can be converted to cash.
▪ Real estate is relatively non-liquid as it takes time to sell and get cash from.
A
Liquidity
20
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Long Term Investing:
* Any asset can appreciate or depreciate in value:
* Income derived from rental property is ________ and will depend on how much is earned per month vs the expenses of the asset per month.
A
Passive Income
21
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Long Term Investing:
* Any asset can appreciate or depreciate in value:
* ________ is one of the main factors behind long term holdings.
A
Cash Flow
22
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Long Term Investing:
* Any asset can appreciate or depreciate in value:
o Cash Flow = Gross Income – Expenses and ________
▪ $12,000/year income - $8,000/year expenses = $4,000 CASH FLOW
A
Loan Costs
23
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Types of Income:
* ________:
The income derived from your daily working activities.
o Income from your job, wages, tips, etc, known as ordinary income.
o Subject to personal income tax bracket and withholdings.
A
Earned Income
24
Q
INVESTMENT, TAX, AND BANKRUPTCY:
Types of Income:
* ________ =
Income derived from assets, not actively working.
o Income from rental properties is a form of passive income.
A
Passive Income
25
BANKRUPTCY:
Types of Income:
* ________ =
o IMPORTANT: Taxed differently from ordinary or earned income.
Passive Income
26
INVESTMENT, TAX, AND BANKRUPTCY:
Types of Income:
* ________:
Income that is earned by an LLC and is taxed at the personal income bracket, it passes through the company to you directly.
Pass Through Income
27
INVESTMENT, TAX, AND BANKRUPTCY:
Types of Income:
* Pass Through Income:
o IMPORTANT: Investors often have LLC’s take title to property.
o IMPORTANT: Avoids ________.
Double Taxation
28
INVESTMENT, TAX, AND BANKRUPTCY:
Investment Property Income and Tax Consequences:
* IMPORTANT: Tax is payable on net income received after ________, ________, and ________are calculated.
Mortgage Interest
Depreciation
Operating Expenses
29
INVESTMENT, TAX, AND BANKRUPTCY:
Investment Property Income and Tax Consequences:
* Investment property income is payable at ________ income tax rates.
Average
30
INVESTMENT, TAX, AND BANKRUPTCY:
Investment Property Income and Tax Consequences:
▪ Investment income could be from ________, ________, ________ etc.
Rents
Royalties
Dividends
31
INVESTMENT, TAX, AND BANKRUPTCY:
Short and Long Term Gains:
* IMPORTANT: ________ (profits) are the main reason why investors look at real estate as an investment.
* Figuring out and estimating profit or loss is crucial in making sound decisions.
Gains
32
INVESTMENT, TAX, AND BANKRUPTCY:
Short- and Long-Term Gains:
* Short term gains are taxed at the short-term capital gains ________.
Rate
33
INVESTMENT, TAX, AND BANKRUPTCY:
Short and Long Term Gains:
* Long term gains are taxed at long term capital gains ________.
Rate
34
INVESTMENT, TAX, AND BANKRUPTCY:
Short and Long Term Gains:
* Gains are calculated when a profit is ________ (Actually Happens).
Realized
35
INVESTMENT, TAX, AND BANKRUPTCY:
Short and Long Term Gains:
* A loss is always possible also and is calculated at the time of ________.
Sale
36
INVESTMENT, TAX, AND BANKRUPTCY:
Short and Long Term Gains:
Real world advice here NEVER give ________ or ________ advice to your clients. We are not trained in such capacity, and this could get you into trouble if and when things go wrong!
Tax Advice
Investing Strategy
37
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
* IMPORTANT: Gains that are not derived from ordinary or earned income are called _______.
Capital Gains
38
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
o _______:
This is the difference between net proceeds and the adjusted basis.
Capital Gains
39
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
* Called capital gains for tax purposes because they are taxed different from
ordinary income and are usually taxed at a _______ rate.
Lower
40
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
* Capital gain is equal to the amount realized at _______ after a sale.
Close of Escrow
41
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
* To compute capital gains, we identify the “BASIS” and the “IMPROVEMENTS”:
o _______ = Purchase price of an asset plus costs associated with the purchase.
Cost Basis
42
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
* Capital gain is equal to the amount _______ at close of escrow after a sale.
Realized
43
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
* To compute capital gains, we identify the “Basis” and the “Improvements”:
o _______: Money Spent on asset including repairs or improvements.
Capital Improvements
44
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
▪ New Windows, new roof, added on, these are _______.
Capital Improvements
45
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
▪ IMPORTANT: Normal repairs and maintenance are not considered _______.
Improvements
46
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
* Capital gain is equal to the _______ realized at close of escrow after a sale.
Amount
47
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
* To compute capital gains, we identify the “Basis” and the “Improvements”:
o _______ = Cost Basis + Capital Improvements – Depreciation.
Adjusted Basis
48
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
* To compute capital gains, we identify the “Basis” and the “Improvements”:
o Adjusted Basis = _______ + Capital Improvements – Depreciation.
Cost Basis
49
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
* To compute capital gains, we identify the “Basis” and the “Improvements”:
o Adjusted Basis = Cost Basis + _______ – Depreciation.
Capital Improvements
50
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
* To compute capital gains, we identify the “Basis” and the “Improvements”:
o Adjusted Basis = Cost Basis + Capital Improvements – _______.
Depreciation
51
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
▪ _______ are charged on the capital gain realized from the sale of income properties that were either held for a long term or short-term duration.
Taxes
52
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
* Capital gain is equal to the amount realized at close of escrow after a sale.
* IMPORTANT:
Formula for Capital Gain: (_______ – selling costs) - adjusted basis.
Sales Price
53
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
* Capital gain is equal to the amount realized at close of escrow after a sale.
* IMPORTANT:
Formula for Capital Gain:
(sales price – _______) - adjusted basis.
Selling Costs
54
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
* Capital gain is equal to the amount realized at close of escrow after a sale.
* IMPORTANT:
Formula for Capital Gain:
(sales price – selling costs) - _______.
Adjusted Basis
55
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
o _______:
Amount the property sold for.
Sales Price
56
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation:
o _______:
Total of all costs relating to the sale of the property.
- Sales Commission, escrow and title fees, etc.
Selling Costs
57
INVESTMENT, TAX, AND BANKRUPTCY:
Capital Gains & Taxation Formula:
* Example: Investor purchased a property for $130,000 and put $30,000 into
improvements. He kept the property for a year for $2,000 in depreciation and spent
$8,000 in selling cost. He sold the building for $200,000. What is the investor’s gain?
* Transaction Facts:
o Cost Basis: $130,000
o Improvements: $30,000
o Depreciation: $2,000
o Selling costs: $8,000
o Sales Price: $200,000
* Calculations
o Adjusted Basis = “Cost Basis + Capital Improvements – Depreciation”
▪ AB= ($130,000 + $30,000) - $2,000 = $158,000
o “Gain = (sales price – selling costs) - adjusted basis”
▪ ($200,000 - $8,000) - $158,000 =
ANSWER:
$34,000 net gain
58
INVESTMENT, TAX, AND BANKRUPTCY:
Calculating Returns:
* There is a ratio in figuring out a return percentage known as _______.
Return on Investment (ROI)
59
INVESTMENT, TAX, AND BANKRUPTCY:
Calculating Returns:
o Return on Investment [R.O.I.]: _______ / cost of investment.
▪ IMPORTANT: $10,000 profit / $100,000 purchase = 10% Return on Investment (ROI)
Profit from Investment
60
INVESTMENT, TAX, AND BANKRUPTCY:
Calculating Returns:
o _______:
Profit from Investment / cost of investment.
▪ IMPORTANT: $10,000 profit / $100,000 purchase = 10% Return on Investment (ROI)
Return on Investment [R.O.I.]
61
INVESTMENT, TAX, AND BANKRUPTCY:
Calculating Returns:
o Return on Investment [R.O.I.]: Profit from Investment / _______.
▪ IMPORTANT: $10,000 profit / $100,000 purchase = 10% Return on Investment (ROI)
Cost of Investment
62
INVESTMENT, TAX, AND BANKRUPTCY:
Calculating Returns:
o IMPORTANT: The Return on Investment (ROI) is always a percentage, the _______ the percentage the better and more advantageous the investment.
Higher
63
INVESTMENT, TAX, AND BANKRUPTCY:
_______:
* It is possible to depreciate investment properties over time.
Tax Shelters
64
INVESTMENT, TAX, AND BANKRUPTCY:
* Tax Shelter:
Real estate allowing investors _______ benefits.
Tax
65
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Depreciation:
* IMPORTANT: The government allows for a residential asset’s depreciation over _______ years.
o It is assumed by the government that a residential asset’s life span of usefulness is this number of years.
27.5 Years
66
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Depreciation:
o This allows an investor to post a “_______” in value every year to reduce taxable income derived from the property.
Loss
67
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Depreciation:
* The government allows for a COMMERCIAL or RETAIL asset’s depreciation over _______39 years.
o It is assumed by the government that the building has a useful life span of this number of years.
39 Years
68
INVESTMENT, TAX, AND BANKRUPTCY:
_______:
▪ You can never depreciate the land portion of total value
▪IMPORTANT: Land always has a value!!
Tax Depreciation
69
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Depreciation:
Quiz:
* $10,000 rental income at 25% tax = $2,500 a year in taxable income
* $10,000 rental income - $6,000 in depreciation = $4000 a year in taxable income:
o $4,000 rental income at 25% tax = $1,000
o $2,500 - $1,000 = _______ tax savings
$1,500
70
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
One common reason investors like investing in real estate is the benefit of:
Future appreciation
Guaranteed tax savings
Depreciation of value
Lower tax brackets
Future Appreciation
71
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Deferment [1031 Exchanges]:
* To parlay or postpone paying tax on capital gains, an investor can continue to reinvest
the gains by using a ________ or a Tax Deferment granted by the IRS.
1031 Exchange
72
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Deferment [1031 Exchanges]:
* The tax deferment is NOT forever but is extended until the gains are fully realized.
o IMPORTANT: This is only to postpone the inevitable and is reserved for ________.
Investments
73
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Deferment [1031 Exchanges]:
* Preparing an exchange requires planning on the timing of the sale and future
purchases.
* Before the first sale takes place, investor will hire a 3rd party as a ________.
Facilitator
74
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Deferment [1031 Exchanges]:
o ________:
Someone who handles a transaction but has no fiduciary duty.
▪ They can be an escrow company, attorney or bank.
Facilitator [Intermediary]
75
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Deferment:
* IMPORTANT: Purchase of NEW properties must be EQUAL or ________ in value than the SOLD property.
Greater
76
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Deferment:
o Possible to exchange up to ________ properties for the 1 sold.
- Example: "I sold one property in Phoenix and can use the funds from that sale to buy up to three more properties in Tucson, as long as they are all equal to or greater in value then the property I just sold.
3
77
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Deferment:
o Possible to buy larger or more expensive property or properties.
o Properties must be like or as the same as sold.
▪ IMPORTANT: Real estate ONLY FOR ________, not a condo sold and exchanged for a car.
Real Estate
78
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Deferment:
o Possible to buy larger or more expensive property or properties.
o Properties must be like or as the ________ as sold.
▪ IMPORTANT: Real estate ONLY FOR real estate, not a condo sold and exchanged for a car.
Same
79
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Deferment:
* IMPORTANT: Purchase of NEW properties must be EQUAL or GREATER in value than the SOLD property.
* Facilitator will hold onto ________ after sale of property and all new properties.
Gains
80
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Deferment:
- IMPORTANT: Must close within ________ Days.
o IMPORTANT: If INVESTOR fail to close on like properties within time, taxes owed on the GAINS of the sold property.
* If the investor wants some cash from the sale, they will pay taxes on that money.
180 Days
81
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Deferment:
- IMPORTANT: Must close within 180 days.
o IMPORTANT: If INVESTOR fail to close on like properties within time, taxes owed on the GAINS of the sold property.
* If the investor wants some cash from the sale, they will pay ________ on that money.
Taxes
82
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Deferment:
- IMPORTANT: Must be identified within ________ Days after initial property sold.
45 Days
83
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Deferment:
o ________:
Money taxed at time of exchange that investor took from sale.
Boot
84
INVESTMENT, TAX, AND BANKRUPTCY:
________:
* The sale of personal real estate could be capital gains tax exempt.
* Must be owner occupied as primary residence.
* Must occupy the home for at least 2 out of the previous 5 years.
Primary Residence Exemption
85
INVESTMENT, TAX, AND BANKRUPTCY:
Primary Residence Exemption:
* The sale of personal real estate could be capital gains ________.
* Must be owner occupied as primary residence.
* Must occupy the home for at least 2 out of the previous 5 years.
Tax Exempt
86
INVESTMENT, TAX, AND BANKRUPTCY:
Primary Residence Exemption:
* The sale of personal real estate could be capital gains tax exempt.
* Must be owner occupied as primary residence.
* Must occupy the home for at least ________ Years out of the previous 5 years.
2 Years
87
INVESTMENT, TAX, AND BANKRUPTCY:
Primary Residence Exemption:
* Tax exempt profits DEPEND on marital status:
o IMPORTANT: $________ profit tax free for unmarried individuals.
$250,000
88
INVESTMENT, TAX, AND BANKRUPTCY:
Primary Residence Exemption:
* Tax exempt profits DEPEND on marital status:
o IMPORTANT: $________ profit tax free for married couples.
$500,000
89
INVESTMENT, TAX, AND BANKRUPTCY:
Installment Contracts (Seller Carry):
These are considered a type of financing, yes, but we are putting this topic here to show you how as an investor who ________ buyers, they will pay taxes on that money earned as income.
Finances
90
INVESTMENT, TAX, AND BANKRUPTCY:
________:
* IMPORTANT: Sellers who choose to carry a buyer over a period of time use this type of agreement.
Installment Contracts / Seller Carry
91
INVESTMENT, TAX, AND BANKRUPTCY:
Installment Contracts (Seller Carry):
▪ Installment Agreements: Sellers carry ________ over time with down payment.
Note
92
INVESTMENT, TAX, AND BANKRUPTCY:
Installment Contracts (Seller Carry):
* Sellers can charge ________ just like a bank would, whatever is agreed upon.
* Seller can use this as a ________ in some cases to their benefit.
Interest
Tax Shelter
93
INVESTMENT, TAX, AND BANKRUPTCY:
Installment Contracts (Seller Carry):
* Could OFFSET taxes on their GAINS in TWO ways:
o IMPORTANT: 1. Sellers don’t pay capital gains tax on the entire sale’s price.
o IMPORTANT: 2. Instead they pay ordinary tax on the ________ received every month. *NOTE TO SELF*
* This is better for the seller since they don’t have to pay capital gains tax on the entire
gain but the gains tax over the life of the seller carry.
Income
94
INVESTMENT, TAX, AND BANKRUPTCY:
Installment Contracts (Seller Carry):
* Seller financing or seller carry loans DO NOT require the ________ or other government regulated forms and disclosures.
NOTE: The statements made here vary depending on who holds political office and can change with different administrations, tax rules, codes and statutes. Remember, you are to provide guidance, not factual accounting or tax advice!
Settlement Statements
95
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
True or False; You can depreciate the land portion of total value.
True
False
False
96
INVESTMENT, TAX, AND BANKRUPTCY:
Case Study:
For how many years can a residential asset depreciate? Does this apply to land as well?
It is assumed by the government that a residential asset’s life span of usefulness is 27.5 years. You can never depreciate the land portion of the total value.
97
INVESTMENT, TAX, AND BANKRUPTCY:
Case Study:
What is a “boot”?
Boot is the money taxed at the time of exchange that the investor took from the sale.
98
INVESTMENT, TAX, AND BANKRUPTCY:
Case Study:
What is required for a primary residence to be exempt from capital gains tax?
The following are the requirements for a primary residence to be exempt from
capital gains tax.
* The sale of personal real estate could be capital gains tax-exempt
* Must be owner-occupied as primary residence
* Must occupy the home for at least 2 out of the previous five years
* Tax-exempt profits depend on marital status
o $250,000 profit tax-free for unmarried individuals
o $500,000 profit tax-free for married couples
99
INVESTMENT, TAX, AND BANKRUPTCY:
Case Study:
What tax benefits would an investor gain by agreeing to an Installment Agreement with a buyer?
An installment Agreement with a buyer is better for the seller since they don't have to pay capital gains tax on the entire gain but the gains tax over the seller's life.
100
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
Barney Rubble paid $165,000 for a rental property in 2003. Over the years, he has made improvements that totaled $33,000. In 2009 he was forced to sell for $155,000 and had total closing costs of $9000. What was his tax liability:
Tax gain of $34,000
Tax loss of $52,000
Tax loss of $10,000
Tax gain of $42,000
Tax loss of $52,000
101
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
A married couple bought their family home outside of Flagstaff in 1989 for $330,000 and then when they decided to sell, the house was in rough shape since no maintenance had been done on it. The best offer that they received was $225,000 in 2018. They closed on the sale and paid out a total of $15,000 in seller fees. What is their combined tax liability?
Tax loss of $90,000
Tax loss of $105,000
Zero
Not enough information to determine the ANSWER
Zero
102
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
Farmer Fran wanted to avoid paying capital gains tax so she traded her 40 acres of land for Rancher Randy’s cattle farm. Rancher Randy gave Farmer Fran an extra $50,000 since her property was bigger and worth more. Who gets taxed on what?
Farmer Fran on the boot of $50,000
Farmer Fran on the boot of $50,000 and Rancher Randy on the loss of $50,000
Rancher Randy on the loss of $50,000
Neither gets taxed since it was an exchange
Farmer Fran on the boot of $50,000
103
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
Banker Bob and his wife built their own home in Paradise Valley for $1,350,000 and lived happily there for 10 years. They sold the home for $2,350,000. What was their tax liability:
$500,000
$1,000,000
$2,500,000
Nothing since it was their primary residence
$500,000
104
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
Which of the following would potentially not be a reason an investor would want to invest in real estate?
Depreciation
Long term gains
Possible to defer taxes
Tax free investing
Tax free investing
105
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
The IRS allows investors to delay paying taxes on their gains using what:
Bulk tax transfer option
Tax difference option
IRS 1019 Ordinance
1031 exchange
1031 exchange
106
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
Deferring of taxes is possible on:
The primary residence as long as less than $500,000 profit for a married couple
The sale of a property that was used as a storage facility
Inherited land that was owned by your parents
The disposal of the families vacation home
The sale of a property that was used as a storage facility
107
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
An installment agreement in real estate investing could be summarized as:
Where the bank settles for less than amount owed
Sellers carry the loan for a buyer over time
Where a seller can pay taxes to the IRS from the proceeds of a sale over time
A method used to repay loan costs, settlement costs and title fees
Sellers carry the loan for a buyer over time
108
INVESTMENT, TAX, AND BANKRUPTCY:
Secured vs Unsecured Debts:
* Borrower who have debts can either have secured or unsecured debts.
* ________ can wipe out either or both of these debts depending on which type and where the loan went to.
NOTE: Think mortgage debt vs pay day loan.
Bankruptcy
109
INVESTMENT, TAX, AND BANKRUPTCY:
Secured vs Unsecured Debts:
o ________:
Debt where collateral was used to secure the financing.
▪ Mortgages, car loans, even a pawn shop loan is secured.
Secured Debt
110
INVESTMENT, TAX, AND BANKRUPTCY:
Secured vs Unsecured Debts:
o Secured Debt:
▪ Lender can TAKE the ________ securing the loan in case of DEFAULT.
Asset
111
INVESTMENT, TAX, AND BANKRUPTCY:
Secured vs Unsecured Debts:
o Unsecured Debt:
Loan where NO ________ was used for the security.
▪ Credit Cards, Personal lines of credit & payday loans.
Collateral
112
INVESTMENT, TAX, AND BANKRUPTCY:
Secured vs Unsecured Debts:
o Unsecured Debt:
▪ There is NO asset as ________ or anything securing the loan for the lender to TAKE in case of DEFAULT.
Collateral
113
INVESTMENT, TAX, AND BANKRUPTCY:
First or Junior Position:
* Lenders always want to be first in line as they are first to get ________ in case of a borrower defaulting on all of their loans and declaring a bankruptcy.
Paid
114
INVESTMENT, TAX, AND BANKRUPTCY:
First or Junior Position:
* In a HOME FINANCING, the first mortgage is in first line to get paid back, then 2nd and 3rd
o Lender #2 or #3 are taking a larger risk, hence usually ________ rates/terms.
Higher
115
INVESTMENT, TAX, AND BANKRUPTCY:
First or Junior Position:
o Junior Lien Holders lenders behind the primary lender in loan position.
o Commonly seen in unsecured liens like landscaping or ________ lenders. They normally have higher interest rates due to this risk.
Pool Construction
116
INVESTMENT, TAX, AND BANKRUPTCY:
Subrogation Of Lien Position:
o A junior lien holder can step in and pay off or ________ the position of the first or primary lien holder in an attempt to secure their own interest in the foreclosure.
- This would avoid being wiped out if not enough money is acquired at the time of foreclosure sale.
Acquire
117
INVESTMENT, TAX, AND BANKRUPTCY:
________:
o Once the primary lien holder has successfully foreclosed, for amounts of less than what was owed to all parties, the junior lien holders are wiped out – they cease to survive.
Subrogation Of Lien Position
118
INVESTMENT, TAX, AND BANKRUPTCY:
Subrogation Of Lien Position:
- Junior lien holders may have other rights to collect on the debt but ________ foreclosure, they are cleared from the property itself.
After
119
INVESTMENT, TAX, AND BANKRUPTCY:
Seller Bankruptcy:
* The government will allow bankruptcies under different forms:
* ________:
Liquidation of unsecured debts such as credit cards or medical bills.
Chapter 7
120
INVESTMENT, TAX, AND BANKRUPTCY:
Seller Bankruptcy:
* The government will allow bankruptcies under different forms:
Chapter 7:
o Shortest time, usually all done in a few months.
o A trustee is appointed to administer your case.
o Trustee has to sell any ________ property to pay back your creditors.
Non-Exempt
121
INVESTMENT, TAX, AND BANKRUPTCY:
Seller Bankruptcy:
* The government will allow bankruptcies under different forms:
* ________:
Allows the restructuring of debts and allows them to be paid them back over time.
Chapter 11
122
INVESTMENT, TAX, AND BANKRUPTCY:
Seller Bankruptcy:
Chapter 11:
* The government will allow bankruptcies under different forms:
o Commonly used by BUSINESSES, but also for individuals.
o No limit on ________ to repay debts.
Time
123
INVESTMENT, TAX, AND BANKRUPTCY:
Seller Bankruptcy:
* The government will allow bankruptcies under different forms:
* ________:
Ability to repay debts over a 5 Year time period.
Chapter 13
124
INVESTMENT, TAX, AND BANKRUPTCY:
Seller Bankruptcy:
* The government will allow bankruptcies under different forms:
* Chapter 13:
o Ability to catch up on missed mortgage payments or strip wholly unsecured junior liens from property you own.
o Pay back all or a portion of your debts through a ________ plan.
Repayment
125
INVESTMENT, TAX, AND BANKRUPTCY:
Seller Bankruptcy:
* The government will allow bankruptcies under different forms:
* Depending on BK, junior liens could be wiped out entirely if ________.
Unsecured
126
INVESTMENT, TAX, AND BANKRUPTCY:
Seller Bankruptcy:
* IMPORTANT: Remember that ________ wipes out all unsecured loans, credit cards, etc. so in this case, there really isn’t a first or junior position for the lenders to be in.
Chapter 7
127
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
This bankruptcy allows the borrower to repay the debts over a 5 year term.
Chapter 5
Chapter 7
Chapter 11
Chapter 13
Chapter 13
128
INVESTMENT, TAX, AND BANKRUPTCY:
Clients, Agents, and Bankruptcy:
* IMPORTANT: Listing a home when the seller is in bankruptcy is ________, but NOT wise.
* The general public MUST be made aware of current or pending Bankruptcy.
Legal
129
INVESTMENT, TAX, AND BANKRUPTCY:
Clients, Agents, and Bankruptcy:
* IMPORTANT: If the seller enters into bankruptcy after the listing, it is BROKER's responsibility to then NOTIFY buyers if they are under contract as this is a ________.
* Agents are deemed responsible for disclosing the possibility that the sellers could not perform due to a pending bankruptcy under fiduciary duties to all.
Material Fact
130
INVESTMENT, TAX, AND BANKRUPTCY:
Clients and Bankruptcy:
Agents are deemed responsible for ________ the possibility that the sellers could not perform due to a pending bankruptcy under fiduciary duties to all.
* Same thing holds true for buyers, if agent finds out, imperative to notify sellers if under contract that buyer is unable to perform.
Disclosing
131
INVESTMENT, TAX, AND BANKRUPTCY:
Clients and Bankruptcy:
o IMPORTANT: Even if paying cash, MUST disclose as sale could be voided.
o IMPORTANT: DISCLOSE it if it is a material item and you feel you would want to know!
o IMPORTANT: Any broker or agent who withholds this is misrepresenting the ________.
Material Fact
132
INVESTMENT, TAX, AND BANKRUPTCY:
Buying Real Estate after A Bankruptcy or Foreclosure:
* Many buyers who have had either a foreclosure or a bankruptcy would like to own a home again.
* Depending on the type of derogatory credit, a potential borrower will have a ________ before a traditional loan can be offered by a federally backed loan.
Waiting Period
133
INVESTMENT, TAX, AND BANKRUPTCY:
Buying Real Estate after A Bankruptcy or Foreclosure:
* In some cases, there are ________ backed loans where borrowers can obtain a
loan much quicker, in some cases, the day after a bankruptcy and or foreclosure.
* For the majority of borrowers, we will focus on this chart which is from Fannie Mae.
Non-Federally
134
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
A mortgage is a _____________ debt as it goes against the property.
Secured
135
INVESTMENT, TAX, AND BANKRUPTCY:
Case Study:
What does a lender do to compensate for the increased risk of Unsecured Debt?
In the case of Unsecured Debt, Lenders are taking a more significant risk and, hence, usually compensate it for higher rates/terms.
136
INVESTMENT, TAX, AND BANKRUPTCY:
Case Study:
How soon after foreclosure would I need to wait to purchase another home using a government-backed loan?
If a borrower defaulted and was foreclosed on, there is a waiting period of 7 years before they can obtain a government-backed or insured loan. If you prove some extenuating circumstances, that time could be reduced to 4 years, but that is hard to prove. It is possible to get a non-conforming loan after a foreclosure, but this was discussing a government-insured loan.
137
INVESTMENT, TAX, AND BANKRUPTCY:
Case Study:
Your client, a seller, accepted an offer on their house yesterday. Today, however, they informed you that they are filing for bankruptcy and hope they can close on their home sale SOON! How do you proceed?
Agents are deemed responsible for disclosing the possibility that the sellers could not perform due to a pending bankruptcy under fiduciary duties to all. The same thing holds for buyers. So, I’ll disclose that bankruptcy for my business transactions as well.
138
INVESTMENT, TAX, AND BANKRUPTCY:
Case Study:
Regarding the lien holder position, why would your loan for a new hot tub have higher rates/terms than your mortgage?
In a home, the first mortgage is in the first line to get paid back, then 2nd and 3rd. Lenders #2 or #3 take a more significant risk, usually higher rates/terms.
139
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
This bankruptcy type is the shortest duration usually:
Chapter 7
Chapter 11
Chapter 12
Chapter 13
Chapter 7
140
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
Under a chapter 13 bankruptcy, a debtor has how long to repay their debts:
18 months
24 months
60 months
Unlimited time
60 months
141
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
Which of the following is an example of a secured debt:
Credit card
Mortgage
Personal line of credit
Payday loan
Mortgage [The home is the collateral.]
142
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
Joan d’Arc is walking away from her property and is declaring a chapter 7 bankruptcy. She had an original mortgage used to buy the property and a personal line of credit that she used when she added a pool and backyard landscaping. In addition, she had a lien on the property from the house painters, and she has run her credit cards up to their limits. Which loans are wiped out entirely?
Credit cards
Credit cards and personal line of credit
Mortgage, credit cards, line of credit
Mortgage, credit cards, line of credit and painters lien
Credit cards and personal line of credit
143
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
Clients Mary and Joe Scatterbrain are going to stop making payments on their home and quickly list it with Realtor Mary Reasonable. Can Mary list this home and why/why not?
No, it would not be allowed since it would go into foreclosure
No, it would not be possible to transfer title due to the buyers walking away
Yes, if she finds out and notifies the public
Yes, if her broker would allow it
Yes, if she finds out and notifies the public
144
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Consequences and ROI Math:
An investor bought a property for 15% below the asking price. She waited 2 years and then
sold the property for 5% more than the original asking price. What was the investor’s profit,
expressed as a percentage?
* Establish A Value (this can be any price)
* We choose $200,000
* 15% below value = $200,000 * .85 (100% -15%) = $170,000
* 5% above value = $200,000 * 1.05 (100% +5%) = $210,000
o $210,000 sale price - $170,000 paid = $40,000 (profit)
* $40,000/$170,000 = .235% or 23.5%
* Her percentage of profit was 23.5%
145
INVESTMENT, TAX, AND BANKRUPTCY:
Tax Consequences and ROI Math:
Haliburton and Associates want to buy an apartment complex in Peoria, AZ. Using the data
from the listing, they want to know what the value is given the fact that the listing agent is
stating a Net Operating Income of $144,450 per year. There are 44 units total and each one
rents for $495 per month. What are the total rents per month on this building?
ANSWER:
Using the numbers and values from ABOVE, what are the total expenses for the building
over the period of a year?
ANSWER:
A. $495 x 44 = $21,780
o The building’s monthly rent is $21,780
* $495 (rent) x 44 Units = $21,780 rental income per month
* $21,780 x 12 months = $261,360 total yearly GROSS income
* $261,360 (GROSS income) - $144,450 (NOI) = $116,910 total expenses
B. $116,910 expenses per year
146
A strip mall in Yavapai county has 13 units total for rent. The appraiser has determined that
there is a 5% vacancy rate overall for the complex and the owner discloses yearly expenses of
$72,360. The seller also states a possible 14% ROI if you pay cash and is renting each space
for $1900/month. Using the math provided by the owner, what is the sales price?
* $1900 (monthly rent) x 13 units = $24,700 monthly income
* $24,700 x 12 months = $296,400 yearly income
* $296,400 (yearly income) x .95 (5% vacancy) = $281,580 adjusted yearly income
* $281,580 (adjusted) - $72,360 (expenses) = $209,220 Net Operating Income
* $209,220 ÷ 14% (.14) = $1,494,429
o $1,494,429 sales price
147
A commercial building has been put up for sale for $3,750,000. There are a total of 30 office
units in the building. All rents are $1500/month and the owners have listed the expenses as
follows: Utilities = $32,000/year, Landscaping = $14,400/year, Insurance = $3600/year, Vacancy
= 10%/year and General Maintenance = $13,000. What is the return on the investor’s money, if
they pay cash?
* $1500 rent x 30 units = $45,000 monthly rent
* $45,000 x 12 months = $540,000 yearly rent
o $540,000 x .90 (10% vacancy) = $486,000 Yearly Gross Rent
* $32,000 + $14,400 + 3600 + 13,000 = $63,000 expenses
* 486,000 - $63,000 = $423,000 yearly net operating income
o $423,000 ÷ 3,750,000 = 11.28%
▪ 11.28% ROI
148
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
Which of these is not a valid type of income?
Earned Income
Past Income
Passive Income
Pass Through Income
Past Income
149
INVESTMENT, TAX, AND BANKRUPTCY:
Case Study:
What is the difference between Earned Income and Passive Income?
The income derived from your daily working activities is Earned Income. While income is derived from assets, not actively working income is Passive Income.
150
INVESTMENT, TAX, AND BANKRUPTCY:
Case Study:
What is the cash flow for a lessor who receives $15,000 yearly rent payments and has $12,000 in associated/operating expenses?
Cash Flow = Gross Income – expenses and loan costs
Cash Flow = $15000 – $12000 = $3,000
151
INVESTMENT, TAX, AND BANKRUPTCY:
Case Study:
[ What is the cash flow for a lessor who receives $15,000 yearly rent payments and has $12,000 in associated/operating expenses? ]
How would the cash flow in the above scenario be taxed? Is this considered Earned or Passive income?
It is passive income derived from assets, not actively working.
152
INVESTMENT, TAX, AND BANKRUPTCY:
Case Study:
In your opinion, why is short-term investing considered riskier than long-term investing?
There is typically a higher risk for short-term investing when working in volatile markets. On the other hand, the advantage of long-term investing is by leveraging; investors hope to see an increase in value based on economic factors (Demand, Utility, Scarcity, Transferability)
153
13 INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
When discussing long term investing strategies, rental property comes in and you suggest that it's a great idea to invest in rental properties due to the tax depreciation benefits and you state you can find some great rentals that could produce positive cash flow in the first year. A rental property with cash flow would best be described by explaining to your client which formula?
Net Income - Expenses
Gross Income - Expenses
Gross Income – Net Income
Gross Income – Vacancies
Gross Income - Expenses
154
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
Which of the following is not a long term gain?
The sale of a property 40 days after you and your spouse acquired it
The sale of a building that was being rented for 4 years
The sale of a primary residence owned for 9 years
A commercial Strip mall is sold as part of a REIT that held it for 18 months
The sale of a property 40 days after you and your spouse acquired it
155
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
Speculation is the term used to describe an (a) investor who:
Would hold a for long term
Is looking to profit in the near future
A property manager who signed a 2 year lease
Developers of properties in high impact zones
Is looking to profit in the near future
156
24 INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
Select the correct statements about short term and long term gains:
Long term gains are taxed at short term capital gains rate
Short term gains are taxed at long term capital gains rate
Figuring out and estimating short term profit or loss is crucial in making sound decisions
A loss is always possible also and is calculated at the time of sale
Figuring out and estimating short term profit or loss is crucial in making sound decisions
A loss is always possible also and is calculated at the time of sale
157
INVESTMENT, TAX, AND BANKRUPTCY:
Case Study:
An investor purchases a home for $150,000 and puts $15,000 worth of labor and materials into it. She then sells the house for $181,500. What was the ROI?
R.O.I. = Return on Investment = profit from investment / cost of investment
Cost of investment = $150,000 + $ 15,000 = $165,000
Profit from investment = $181,500 – $165,000 = $16,500
R.O.I = 10%
158
INVESTMENT, TAX, AND BANKRUPTCY:
Case Study:
An investor purchases a home for $150,000 and puts $15,000 worth of labor and materials into it. She then sells the house for $181,500. What was the ROI?
Regarding the above scenario, what would the ROI be if the investor overpaid for the property and could only sell it for $160,000 after completing the same repairs and upgrades?
R.O.I. = Return on Investment = profit from investment / cost of investment
Cost of investment = $150,000 + $ 15,000 = $165,000
Profit from investment = $160,000 – $165,000 = - $5000
R.O.I = - 3.03 % (Loss)
159
INVESTMENT, TAX, AND BANKRUPTCY:
Case Study:
How are capital gains calculated?
Capital Gains = Difference between net proceeds and the adjusted basis.
160
INVESTMENT, TAX, AND BANKRUPTCY:
Case Study:
You are driving with a client looking to start flipping houses. They trust you and your knowledge. What do you suggest to your client when setting up an LLC or another type of corporation for my flipping business?
As a real estate agent, you are not able to provide legal advice or financial advice. You should either direct them to a professional of state your opinion, but never give advice on taxes, liabiliites, gains, losses, future values, construction, legal matters and the list goes on.
161
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
Which of the following could not be depreciated:
Land
Rental properties
Commercial properties
Investment REIT owned Properties
Land
162
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
When discussing long term investing strategies, rental property comes in and you suggest that it's a great idea to invest in rental properties due to the tax depreciation benefits and you state you can find some great rentals that could produce positive cash flow in the first year. A rental property with cash flow would best be described by explaining to your client which formula?
Net Income - Expenses
Gross Income - Expenses
Gross Income – Net Income
Gross Income – Vacancies
Gross Income - Expenses
163
INVESTMENT, TAX, AND BANKRUPTCY:
Quiz:
Which of the following is not a long term gain?
The sale of a property 40 days after you and your spouse acquired it
The sale of a building that was being rented for 4 years
The sale of a primary residence owned for 9 years
A commercial Strip mall is sold as part of a REIT that held it for 18 months
The sale of a property 40 days after you and your spouse acquired it
