Real Estate Investment Real Estate Investment

Chapter 7Chapter 7

Special Income Tax Rules Applicable to Real Estate

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© 2011 Cengage Learning

Key TermsKey Terms

Adjusted basis

American Jobs Creation Act of 2004 (AJCA)

Applicable Federal Rates (AFR)

Credit-tenant

Defer

Eligible basis

Escrow agent

General public

Gross profit

Gross profit percentage

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Key TermsKey Terms

Installment sale

Installment sale income

Involuntary conversion

Involuntary exchange

Like-kind property

Nontransient

Qualifying tenants

Rehabilitation

Relief of debt

Selling price

Set-aside requirements

Tax credit

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Tax Deferred Exchanges of Tax Deferred Exchanges of PropertyProperty

Tax deferment allowed if gains are reinvested.

Property exchanged must be investment property.

New property must be purchased or identified within 45 days.

Possible extension of 180 days.

Basis will be purchase price of the new property reduced by the untaxed capital gain.

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Unlike Property

If a like-kind exchange includes unlike property a capital gain tax is due from the recipient of the unlike items

Cash

Other property

Net loan relief

Transaction costs

Congress plugs a 1031 “loop hole”

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Tax Credits

Tax credit reduces the taxes owed dollar for dollar.

Investment Tax Credit for RehabilitationRehabilitation definition

Rehabilitation costs must be treated as new property with a separate tax basis of value

50% of external walls must be retained as external walls.

75% of the external retained as internal or external walls.

75% of the building’s internal structure retained in place.

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Tax Credits

Low-Income Housing Tax Credits (LIHTC)

Qualification of Building

Set-Aside Requirements

Calculating the LIHTC Rate and Total Credits Allowed

Rent Restriction

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Involuntary Exchange

Called an involuntary conversion and occurs when property is converted into cash or other consideration through

Condemnation

A natural disaster such as a fire

Any other conversion contrary to the wishes of the owner.

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Installment Sales

Reporting gain on the installment method.

Determine what percentage of the sales price is capital gain.

Later installments are subject to taxation on the same percentage.

Exceptions to Treatment as an Installment Sale.

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Installment Sales

Borrowing Money on an Installment Note

Additional Rules for Installment Sales

Imputed Interest and Applicable Federal Rates

Published rates are determined for various compounding periods and loan terms.

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Sale and Leaseback of Real Property

Frequently a retail chain will build a facility and then sell the property to an investor and then lease it back for the purpose of operating their retail business.

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At Risk Rules

Deductible losses generated by a taxpayer’s business activities are generally limited and cannot exceed the amount the taxpayer has at risk in that particular activity.

At risk is defined as the sum of three contributions by the taxpayer to the activity:

Cash

The adjusted basis of other property contributed.

Any amounts borrowed for use in the activity for which the taxpayer is personally liable.