Chapter 20 · National foundations
Taxes, Investment, and Specialty Interests
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Property taxes and assessments
Ad valorem Based on value, as in a property tax calculated using taxable assessed value. See Chapter 20. Glossary taxes are based on taxable assessed value under the relevant system. Assessed value, Market value An opinion of value under a defined market-value premise, not necessarily asking price or cost. See Chapter 14. Glossary, exemptions, Assessment A valuation or charge under a tax or improvement system; context determines meaning. See Chapter 20. Glossary ratios, rates, and reassessment rules vary. A Mill One dollar of tax per $1,000 of taxable value. See Chapter 20. Glossary is one dollar of tax per $1,000 of taxable value. A Special assessment A charge associated with a specified public improvement or benefit under law. See Chapter 20. Glossary charges for a specified public improvement or benefit and is not merely another name for all annual property taxes.
Tax Lien A security claim or charge against property for an obligation. See Chapter 5. Glossary can receive statutory priority. Tax-sale procedures and Redemption Recovery of property or relief from enforcement by satisfying applicable obligations within an allowed period. See Chapter 7. Glossary periods are not uniform nationwide. A familiar tax rate from your own home is not evidence of another property's future bill. S05 S01
Basis, gain, and proceeds
Adjusted basis Tax basis after required increases and decreases, distinct from mortgage debt. See Chapter 20. Glossary commonly begins with acquisition basis and is changed by items such as qualifying capital improvements and Depreciation In appraisal, loss in improvement value; in tax, allocation of qualifying basis under prescribed rules. See Chapter 14, Chapter 20. Glossary adjustments. Amount realized generally considers sale proceeds and applicable selling expenses under tax rules. Gain is not simply the cash the seller receives after paying a mortgage.
Hypothetical: Amount realized after selling expenses is $460,000, adjusted basis is $300,000, and mortgage payoff is $250,000. The simplified gain is $160,000. The $210,000 remaining after the payoff is a different calculation. Paying off the mortgage does not generally erase the gain. Actual tax calculations require appropriate advice. S42 S45
Principal-residence gain exclusion
Qualifying taxpayers may exclude up to $250,000 of gain, or up to $500,000 for qualifying married couples filing jointly. Ownership, use, prior-exclusion, and other requirements apply; the familiar starting point is ownership and use for two of the five years before sale. Joint-filer requirements are not satisfied merely by being married. Certain depreciation-related gain and nonqualified use can limit the exclusion, and exceptions may permit partial exclusions.
This is an exclusion of qualifying gain, not a $250,000 or $500,000 sale-price ceiling, not a deduction of mortgage payoff, and not a guarantee that every home sale is tax-free. S42
Section 1031 exchanges
Section 1031 can defer recognition of qualifying gain on an exchange of real property held for business or investment for qualifying like-kind real property. Property held primarily for sale and a purely personal residence generally do not qualify on that basis. Tax deferral is not the same as permanent elimination of all gain.
In a deferred exchange, identification generally must occur within forty-five days. Receipt of replacement property generally must occur by the earlier of 180 days or the applicable tax-return due date, including extensions, under the statute. Receiving non-like-kind value, often called Boot Non-like-kind value received in an exchange, potentially producing recognized gain. See Chapter 20. Glossary, can trigger recognized gain under applicable rules. Constructive receipt, qualified-intermediary arrangements, related parties, debt changes, and mixed-use property require specialized advice. S43 S44
Depreciation
Tax Depreciation In appraisal, loss in improvement value; in tax, allocation of qualifying basis under prescribed rules. See Chapter 14, Chapter 20. Glossary allocates qualifying basis over an applicable recovery period. Land is not depreciable. Under common general depreciation-system rules, residential rental buildings use 27.5 years and nonresidential real property generally uses 39 years, with applicable methods, conventions, and exceptions. An exam may ask a simplified full-year straight-line calculation; actual returns can require a mid-month convention and other adjustments.
Example: A problem gives a residential rental building basis of $275,000, excludes land, and instructs you to ignore partial-year conventions. Annual depreciation is $275,000 ÷ 27.5 = $10,000. Do not depreciate the entire purchase price when the problem separately identifies land. S45 S56
FIRPTA
The Foreign Investment in Real Property Tax Act can require a buyer to withhold when acquiring a U.S. real property interest from a foreign seller. The general withholding rate is 15% of the amount realized, not 15% of the seller's gain, but important exemptions, reduced withholding, and certificate procedures exist. Foreign status for tax purposes is not determined simply by an accent, surname, or citizenship Assumption Taking responsibility for an existing loan under the governing arrangement. See Chapter 15. Glossary. Obtain appropriate documentation and professional advice. S46
Investment analysis and risk
Leverage Use of borrowed funds, magnifying potential gains and losses. See Chapter 20. Glossary uses borrowed funds. It can magnify both gains and losses. Positive cash flow does not guarantee a positive total return after capital needs, sale costs, and taxes. Appreciation An increase in value; not a guaranteed feature of ownership. See Chapter 20. Glossary is uncertain, and real estate can be illiquid.
Cash-on-cash return Annual defined cash flow divided by cash invested. See Chapter 20. Glossary commonly compares annual before-tax cash flow with cash invested, using an explicitly defined calculation. Capitalization rate A rate converting specified annual NOI into value in direct capitalization. See Chapter 14. Glossary compares NOI Net operating income before debt service, income taxes, and accounting depreciation under the conventional framework. See Chapter 14. Glossary with value or price. Debt-service coverage NOI divided by annual debt service under the stated convention. See Chapter 20. Glossary ratio compares NOI with annual debt service. These ratios answer different questions.
An investor should consider vacancy, collections, operating costs, capital replacements, financing, market demand, legal restrictions, and concentration risk. A price increase is not an operating-income increase, and Principal In agency, the represented client; in finance, the loan balance apart from interest. See Chapter 8, Chapter 15. Glossary repayment is not an NOI expense. S15
Real estate securities and other specialties
A real estate investment trust, or REIT A real estate investment trust; its interests may be securities with distinct risks and rules. See Chapter 20. Glossary, is an investment structure that can own or finance income-producing real estate. Publicly traded and nontraded REITs have different trading and liquidity characteristics. A real estate License In property use, permission distinct from an estate; in professional regulation, authorization to practice. See Chapter 5, Chapter 19. Glossary does not automatically authorize selling securities interests in a REIT or a syndication. Securities-law advice may be required. S47
Agricultural, commercial, industrial, development, business-opportunity, and timeshare transactions can involve specialized valuation, licensing, disclosure, environmental, and contract issues. Know the vocabulary your outline lists, but do not assume a residential form and ordinary brokerage authority are sufficient for every specialty. S01
A seller nets little cash after paying a large mortgage. Does that establish there is no taxable gain?