1. Real Estate Investment Chapter 7 Special Income Tax Rules Applicable to Real Estate © 2011 Cengage Learning

2. Key Terms Adjusted basis American Jobs Creation Act of 2004 (AJCA) Applicable Federal Rates (AFR) Credit-tenant Defer Eligible basis Escrow agent General public Gross profit Gross profit percentage

3. © 2011 Cengage Learning Key Terms Installment sale Installment sale income Involuntary conversion Involuntary exchange Like-kind property Nontransient Qualifying tenants Rehabilitation Relief of debt Selling price Set-aside requirements Tax credit

4. © 2011 Cengage Learning Tax Deferred Exchanges of Property Tax deferment allowed if gains are reinvested. Property exchanged must be investment property. New property must be purchased or identified within 45 days. Possible extension of 180 days. Basis will be purchase price of the new property reduced by the untaxed capital gain.

5. © 2011 Cengage Learning Unlike Property If a like-kind exchange includes unlike property a capital gain tax is due from the recipient of the unlike items Cash Other property Net loan relief Transaction costs Congress plugs a 1031 “loop hole”

6. © 2011 Cengage Learning Tax Credits Tax credit reduces the taxes owed dollar for dollar. Investment Tax Credit for Rehabilitation Rehabilitation definition Rehabilitation costs must be treated as new property with a separate tax basis of value 50% of external walls must be retained as external walls. 75% of the external retained as internal or external walls. 75% of the building’s internal structure retained in place.

7. © 2011 Cengage Learning Tax Credits Low-Income Housing Tax Credits (LIHTC) Qualification of Building Set-Aside Requirements Calculating the LIHTC Rate and Total Credits Allowed Rent Restriction

8. © 2011 Cengage Learning Involuntary Exchange Called an involuntary conversion and occurs when property is converted into cash or other consideration through Condemnation A natural disaster such as a fire Any other conversion contrary to the wishes of the owner.

9. © 2011 Cengage Learning Installment Sales Reporting gain on the installment method. Determine what percentage of the sales price is capital gain. Later installments are subject to taxation on the same percentage. Exceptions to Treatment as an Installment Sale.

10. © 2011 Cengage Learning Installment Sales Borrowing Money on an Installment Note Additional Rules for Installment Sales Imputed Interest and Applicable Federal Rates Published rates are determined for various compounding periods and loan terms.

11. © 2011 Cengage Learning Sale and Leaseback of Real Property Frequently a retail chain will build a facility and then sell the property to an investor and then lease it back for the purpose of operating their retail business.

12. © 2011 Cengage Learning At Risk Rules Deductible losses generated by a taxpayer’s business activities are generally limited and cannot exceed the amount the taxpayer has at risk in that particular activity. At risk is defined as the sum of three contributions by the taxpayer to the activity: Cash The adjusted basis of other property contributed. Any amounts borrowed for use in the activity for which the taxpayer is personally liable.