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Chapter 21 Income Tax Considerations
1
New Jersey Real Estate for Salespersons and Brokers
By Marcia Darvin SpadaThomson/South-Western
Copyright, 2006
Chapter 21 Income Tax Considerations
2
Chapter 21
Income Tax Considerations
Chapter 21 Income Tax Considerations
3
Chapter 21 Key Terms Adjusted basis Appreciation Boot Cash flow Capital gain Capital loss
Cost recovery Debt service Straight-line
depreciation Tax depreciation Tax-deferred
exchange Tax shelter
Chapter 21 Income Tax Considerations
4
The Seven Federal Income Tax Brackets 0 % 10 % 15 % 25 % 28 % 33 % 35 %
Most taxpayers
fall between 15
and 28 percent
Chapter 21 Income Tax Considerations
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Classifications of Income
Income Definition
Active Salaries-participation
Portfolio Interest, annuities,dividends, royalties
Passive activity
Conducting business-no participation
Chapter 21 Income Tax Considerations
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Capital Gains Tax
Capital gain-profit
from sale of real
estate
If property held longer
than 12 mos, taxed at
15% if taxpayer above
15% bracket
For sale of residence:
$250,000 exclusion if single; $500,000 exclusion if married
Must have owned and resided in home two of the last five years
Chapter 21 Income Tax Considerations
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Tax Depreciation
Tax Depreciation
Tax Depreciation
Business deductionBusiness deduction
Property sheltered
from taxation
Property sheltered
from taxation
Accounting concept
Accounting concept
Depreciationschedule
Depreciationschedule
Recovery of cost
or other basis
Recovery of cost
or other basis
Not for assets for
personal use
Not for assets for
personal use
27.5 yrs residential
31.5 or 39 yrsnon residential
27.5 yrs residential
31.5 or 39 yrsnon residential
Property mayappreciate
Property mayappreciate
Chapter 21 Income Tax Considerations
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Cash Flow
Cash flow
Net proceeds after
all expenses are
met
either before or
after taxes
Income = $500,000
Expenses =
$300,000
Cash flow (net
return) = $200,000
Chapter 21 Income Tax Considerations
9
Tax-Deferred Property Exchanges Business or commercial
property only
Like kind
Qualified intermediary
Purchase price of
replacement property
has equal or greater level
of debt
All money from property
sold must be used to buy
replacement property
