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Chapter 15Federal Income

Taxation and BasicPrinciples of RealEstate 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

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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 depreciationbasisbootcapital gaindeferred gain rolloverdepreciationInvoluntary conversionlike-kind property (Section 1031) exchangesmultiple exchangeopportunity costpassive incomeproration of the universal exclusionrealized gainStarker exchange/Starker truststraight-line depreciationtax-deductible expensesTaxpayer Relief Act of 1997universal exclusionunlike-kind property

CHAPTER TERMINOLOGY REVIEW