Unit 18 Flashcards
Learning Objective: Explain the advantages and disadvantages of investing in real estate.
Answer: Advantages include potential for appreciation, regular income from rent, tax benefits, and diversification of investment portfolio. Disadvantages include lack of liquidity, management responsibilities, and risks from market fluctuations and property-specific issues.
Learning Objective: Describe major components of the investment decision: property appreciation, income potential, and the use of leverage and pyramiding.
Answer: Property appreciation increases asset value over time, income potential arises from rental revenues, and leverage uses borrowed funds to maximize returns. Pyramiding involves reinvesting equity or profits to acquire additional properties.
Learning Objective: Identify the key tax benefits of investing in real estate.
Answer: Tax benefits include deductions for mortgage interest, property depreciation, maintenance expenses, and deferrals or exclusions of capital gains through exchanges or installment sales.
Learning Objective: Distinguish the types of real estate investment syndicates and/or trusts.
Answer: Syndicates may include general partnerships, limited partnerships, and real estate investment trusts (REITs). REITs allow investors to pool resources for large-scale property investments, offering income without direct property management responsibilities.
Key Term: Adjusted Basis
Definition: The original cost of a property plus improvements, minus depreciation claimed for tax purposes.
Key Term: Appreciation
Definition: An increase in property value over time due to market conditions or improvements.
Key Term: Basis
Definition: The original cost of a property, used for tax purposes to calculate gains or losses.
Key Term: Boot
Definition: Non-like-kind property or cash included in a property exchange to balance values between parties.
Key Term: Cash Flow
Definition: The net income from a property after deducting all operating expenses and debt service.
Key Term: Capital Gain
Definition: The profit earned from the sale of a property, calculated as the difference between the selling price and the adjusted basis.
Key Term: Depreciation
Definition: A tax deduction that accounts for wear, tear, and obsolescence of investment property.
Key Term: Diversification
Definition: The strategy of spreading investments across different asset classes to minimize risk.
Key Term: Exchange
Definition: A transaction in which one investment property is traded for another, potentially deferring capital gains taxes.
Key Term: Inflation
Definition: The decrease in purchasing power of money due to an increase in prices over time.
Key Term: Installment Sale
Definition: A sale of property where the buyer makes payments over time, allowing the seller to report gain incrementally for tax purposes.
Key Term: Intrinsic Value
Definition: The inherent worth of a property based on its unique features and location, independent of market conditions.
Key Term: Leverage
Definition: The use of borrowed funds to finance the purchase of real estate, amplifying potential returns on investment.
Key Term: Pyramiding
Definition: A strategy where equity or profits from one property are reinvested to acquire additional properties.
Key Term: Real Estate Investment Trust (REIT)
Definition: A company that owns, operates, or finances real estate, allowing investors to earn income from real estate without direct ownership.
Key Term: Real Estate Mortgage Investment Conduit (REMIC)
Definition: A special-purpose vehicle used to pool mortgage loans and issue mortgage-backed securities.
Key Term: Tax Credit
Definition: A direct reduction in tax liability, often provided as an incentive for investments in specific types of real estate, such as historic preservation or low-income housing.
Key Term: Tax Shelter
Definition: Legal strategies used to reduce taxable income, such as property depreciation, mortgage interest deductions, and capital gains deferrals.
When an investor purchases a parcel of real estate through the use of borrowed funds, she is taking advantage of
A. leverage.
B. depreciation.
C. capital gains.
D. exchanging.
Answer: A. Leverage.
Reasoning: Leverage allows an investor to use borrowed funds to increase purchasing power and amplify potential returns.
An investment syndicate in which all members share equally in the managerial decisions, profits, and losses involved in the venture is an example of a
A. real estate investment trust.
B. limited partnership.
C. real estate mortgage trust.
D. general partnership.
Answer: D. General partnership.
Reasoning: In a general partnership, all members share management responsibilities and profits/losses equally.