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.
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