Transcript Income Taxes and Real Estate

Income Taxes and Real Estate
Item
Net Operating Income
- Depreciation
- Interest Expense
- Amortized Financing Costs
= Taxable Income
x Tax Rate
= Tax Liability
Symbol
(NOI)
(DEP)
(INT)
(AFC)
(TI)
(TR)
(TAX)
Things to Remember
Repairs are an expense, improvements
have to be depreciated
 Maintenance is an expense, replacements
must be capitalized.
 Interest expense is only deductible in the
year it was incurred. Prepaid interest
must be amortized.

Residential property can be depreciated
straight-line over 27.5 years
 Commercial property is depreciated over
39 years
 Don’t forget the mid-month convention –
property is assumed to be purchased in
the middle of the month of acquisition
regardless of when it was actually
obtained.

Depreciation
The original cost basis includes all costs
associated with acquiring the property and
transferring the title
 Land value cannot be depreciated
 The depreciable basis is the total value
that can be depreciated over the recovery
period
 Depreciable Basis= Cost Basis- Land
Amount

 Annual
Depreciation=
Depreciable Basis/ Recovery Period
 mid-month
convention
IRS Income Categories
Active Income (e.g., salaries, wages,
bonuses, and commissions.)
 Portfolio Income (e.g., interest, dividends,
and capital gains.)
 Passive Income (e.g., rents from real
estate, and royalties from oil and gas
rights.)

Passive Activity Loss Restrictions
Passive losses cannot be used to reduce
active or portfolio income
 Passive losses may be used to reduce
other passive income
 Passive losses not used may be used in
future years or at the same time of sale
 Active participants may deduct up to
$25,000 in passive losses against other
non-passive income, subject to limitations

Rental activity is deemed passive by the
IRS.
 However, the IRS does differentiate
between those that materially participate
and those that don’t.
 Material participation is more than 500
hours per year or more than 100 hours
(and not less than any other participant.)
 Losses not used are carried forward.
