© 2015 OnCourse Learning Chapter 15 Federal Income Taxation and Basic Principles of Real Estate Investment

IN THIS CHAPTER Real estate licensees should recommend that buyers and sellers seek specialized expertise. The fundamentals of tax implications in the ownership and sale of a principal residence and business and investment property. Special tax benefits provided to owners and sellers. Basic real estate investment principles

Depreciation Deductible allowance from net income of property when arriving at taxable income. No depreciation allowed for land.

Passive Income Any tax losses from investment property are allowable only to offset income from passive activities.

INTEREST AND TAXES The tax-deductible expenses of home ownership are – mortgage interest – ad valorem real property taxes – points 2010©Cengage Learning. All Rights Reserved.

Sales of Principal Residences Married homeowners may exclude from taxation up to $500,000 of the gain from the sale. Single homeowners are allowed to exclude up to $250,000. The taxpayer must have owned and occupied the home as a principal residence for at least two of the last five years.

Capital Gains A gain or loss on the sale of an asset is not recognized for income tax purposes until you dispose of the asset. When gain becomes taxable it may be eligible for the preferential capital gains tax rates depending upon the length of ownership. Professionals should be consulted to determine the exact date and rate for any transaction.

Estate and Gift Taxation A gift tax is imposed on lifetime transfers by gift. An estate tax is imposed on transfers at death.

Like-Kind (Section 1031) Exchanges The properties must be like-kind. No boot received or taxable. Basis of property are exchanged. The property for exchange must be identified in writing within 45 days. The closing on the property must be within 180 days. No tax due at time of exchange – no sale.

Self-Employed Persons Home Office Deductions Health Insurance Deductions Business Expenses

REAL ESTATE INVESTMENT Capital appreciation Cash flow Tax advantages Tax deferral Time value of money – A dollar received today is more valuable than a dollar received next year.

 Accelerated depreciation  basis  boot  capital gain  deferred gain rollover  depreciation  Involuntary conversion  like-kind property (Section 1031) exchanges  multiple exchange  opportunity cost  passive income  proration of the universal exclusion  realized gain  Starker exchange/Starker trust  straight-line depreciation  tax-deductible expenses  Taxpayer Relief Act of 1997  universal exclusion  unlike-kind property CHAPTER TERMINOLOGY REVIEW