1. Real Estate and High-Risk Investments Chapter 16

2. Real Estate It consists of land, all structures permanently attached to the land, and accompanying rights and privileges, such as crops and mineral rights. Direct ownership occurs when an investor holds actual legal title to the property.

3. Current Gain

4. Capital Gain Price appreciation leads to capital gains. Capital gains = sale price – (purchase price + capital improvement. Repair expenses are not included in the calculation above. Leverage can increase capital gain.

5. Beneficial Tax Treatments Depreciation is tax deductible. Interest is tax deductible. Tax-free exchanges. Capital gains are taxed at reduced rates. Rental income tax regulations on vacation homes.

6. Pricing Real Estate Discounted cash-flow method can be used to price real estate. The method discounts after-tax cash flow at the required return. All discounted cash flows are summed to achieve the correct price for the asset.