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TAX ASPECTS

OF REAL ESTATE

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TAXATION

What is taxation?Madison- a necessary evilAmerican Revolution…tea bagsPower to tax is the power to destroyBeatles- “Taxman”

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Taxation

Sources of tax revenueInternational, federal, state & localWOW!Death TaxesFeesValue Added Tax (VAT)Unfunded mandates

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Taxation

Power to taxGeneral Police Power of StatesFederal government

Art. 1 § 8. – delegated powersArt. 1 § 2; § 9 – restrictionAmendment XVI (1913) – direct/ without apportionment

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Taxation

State taxationIncome taxInheritance/estate tax/otherProperty Tax

Ad Valorem taxLocal, schools, county85% of local gov’t revenueAssessed value/FMV x millage rate

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Taxation

Property tax (cont.)Challenges to assessed valueFairness – issue of gentrificationReduction for:

Senior citizen Veteran Disabled Other

Exempt Property/Contribution

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Taxation

Tax v. Fees (issue of deduction)Transfer Tax

Varies by stateNJ progressive/mansion taxPA 2% - split by seller & buyer

Local addition Mortgage escrow (negotiate)

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Taxation

Transfer TaxNonpayment

Mortgage default Tax lien (1st priority) Tax sale Tax deed – subject to challenge

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Taxation

Federal taxationIncome tax

Who pays?Alternative minimum tax

Estate, Gift, and Generation skipping transfer tax

Business Entities, Trusts, & Estates

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Taxation

% filers Top 1% Top 5% Top 10% Bottom 50%

% Inc Tax 40% 61% 71% 2.9%

% AGI 23% 37% 48%

Tax Inc 410,100 160,000 113,000

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Taxation

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

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Taxation

Federal Individual Income TaxGross Income

(certain deductions)

Adjusted gross income

(personal exemption, standard deductions/itemized deductions)

Taxable income

x progressive rates

Tentative tax

(credits)

Tax liability

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Taxation

Real Estate specific deductions & creditsProperty taxesMortgage interest

Acquisition indebtedness $1millionHome equity indebtedness $100,000

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Taxation

Depreciation/cost recoveryFirst time home buyer creditEnergy creditsAt risk rulesPassive activity losses

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Taxation

Gains & lossesG = AR – ABL = AB – AR (sp – exp)AB = “Cost” + Improvements – Cost

RecoveryCapitalize v. Expense

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Taxation

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

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Taxation

Capital gains & losses Capital asset Gains Losses Short/long-term – holding period Netting Preferential rate for LTCG Capital losses Recapture

Installment sales

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Taxation

Transfer taxesState inheritance/estateFederal gift taxFederal estate taxFederal GSTTBasis - §1014/1015

After tax return