1 TAX ASPECTS OF REAL ESTATE

2 TAXATION n What is taxation? u Madison- a necessary evil u American Revolution…tea bags u Power to tax is the power to destroy u Beatles- “Taxman”

3 Taxation n Sources of tax revenue u International, federal, state & local u WOW! u Death Taxes u Fees u Value Added Tax (VAT) u Unfunded mandates

4 Taxation n Power to tax u General Police Power of States u Federal government  Art. 1 § 8. – delegated powers  Art. 1 § 2; § 9 – restriction  Amendment XVI (1913) – direct/ without apportionment

5 Taxation n State taxation u Income tax u Inheritance/estate tax/other u Property Tax  Ad Valorem tax  Local, schools, county  85% of local gov’t revenue  Assessed value/FMV x millage rate

6 Taxation u Property tax (cont.)  Challenges to assessed value  Fairness – issue of gentrification  Reduction for:  Senior citizen  Veteran  Disabled  Other  Exempt Property/Contribution

7 Taxation u Tax v. Fees (issue of deduction) u Transfer Tax  Varies by state  NJ progressive/mansion tax  PA 2% - split by seller & buyer  Local addition  Mortgage escrow (negotiate)

8 Taxation u Transfer Tax  Nonpayment  Mortgage default  Tax lien (1 st priority)  Tax sale  Tax deed – subject to challenge

9 Taxation n Federal taxation u Income tax  Who pays?  Alternative minimum tax u Estate, Gift, and Generation skipping transfer tax u Business Entities, Trusts, & Estates

10 Taxation n % filers n Top 1% n Top 5% n Top 10% n Bottom 50% n % Inc Tax n 40% n 61% n 71% n 2.9% n % AGI n 23% n 37% n 48% n Tax Inc n 410,100 n 160,000 n 113,000

11 Taxation n Voters n 40% paid 0 n +9% 0 under Obama n 11% pay less than $1,000 n 60% n 40% pay 95% n 5% ($250,000) pay 60%

12 Taxation n Federal Individual Income Tax Gross Income (certain deductions) Adjusted gross income ( personal exemption, standard deductions/itemized deductions ) Taxable income x progressive rates Tentative tax (credits) Tax liability

13 Taxation n Real Estate specific deductions & credits u Property taxes u Mortgage interest  Acquisition indebtedness $1million  Home equity indebtedness $100,000

14 Taxation u Depreciation/cost recovery u First time home buyer credit u Energy credits u At risk rules u Passive activity losses

15 Taxation n Gains & losses u G = AR – AB u L = AB – AR (sp – exp) u AB = “Cost” + Improvements – Cost Recovery u Capitalize v. Expense

16 Taxation n Exclusions & nonrecognition u §121 - $250,000/500,000 u Prior §1034 rollover w/121 u §1031 like kind exchange u §1033 involuntary conversion u “Boot”

17 Taxation n Capital gains & losses u Capital asset u Gains u Losses u Short/long-term – holding period u Netting u Preferential rate for LTCG u Capital losses u Recapture n Installment sales

18 Taxation n Transfer taxes u State inheritance/estate u Federal gift tax u Federal estate tax u Federal GSTT u Basis - §1014/1015 n After tax return