Chapter 15
Federal Income
Taxation and Basic
Principles of Real
Estate Investment
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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.
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Self-Employed Persons
• Home Office Deductions
• Health Insurance Deductions
• Business Expenses
REAL ESTATE INVESTMENT
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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.
CHAPTER TERMINOLOGY REVIEW
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