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TAX ASPECTS OF REAL ESTATE

TAX ASPECTS OF REAL ESTATE. TAXATION. What is taxation? Madison- a necessary evil American Revolution…tea bags Power to tax is the power to destroy Beatles- “Taxman”. Taxation. Sources of tax revenue International, federal, state & local WOW! Death Taxes Fees Value Added Tax (VAT)

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TAX ASPECTS OF REAL ESTATE

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  1. TAX ASPECTS OF REAL ESTATE

  2. TAXATION • What is taxation? • Madison- a necessary evil • American Revolution…tea bags • Power to tax is the power to destroy • Beatles- “Taxman”

  3. Taxation • Sources of tax revenue • International, federal, state & local • WOW! • Death Taxes • Fees • Value Added Tax (VAT) • Unfunded mandates

  4. Taxation • Power to tax • General Police Power of States • Federal government • Art. 1 § 8. – delegated powers • Art. 1 § 2; § 9 – restriction • Amendment XVI (1913) – direct/ without apportionment

  5. Taxation • State taxation • Income tax • Inheritance/estate tax/other • Property Tax • Ad Valorem tax • Local, schools, county • 85% of local gov’t revenue • Assessed value/FMV x millage rate

  6. Taxation • Property tax (cont.) • Challenges to assessed value • Fairness – issue of gentrification • Reduction for: • Senior citizen • Veteran • Disabled • Other • Exempt Property/Contribution

  7. Taxation • Tax v. Fees (issue of deduction) • Transfer Tax • Varies by state • NJ progressive/mansion tax • PA 2% - split by seller & buyer • Local addition • Mortgage escrow (negotiate)

  8. Taxation • Transfer Tax • Nonpayment • Mortgage default • Tax lien (1st priority) • Tax sale • Tax deed – subject to challenge

  9. Taxation • Federal taxation • Income tax • Who pays? • Alternative minimum tax • Estate, Gift, and Generation skipping transfer tax • Business Entities, Trusts, & Estates

  10. 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

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

  12. Taxation • Federal Individual Income Tax Gross Income (certain deductions) Adjusted gross income (personal exemption, standard deductions/itemized deductions) Taxable income x progressive rates Tentative tax (credits) Tax liability

  13. Taxation • Real Estate specific deductions & credits • Property taxes • Mortgage interest • Acquisition indebtedness $1million • Home equity indebtedness $100,000

  14. Taxation • Depreciation/cost recovery • First time home buyer credit • Energy credits • At risk rules • Passive activity losses

  15. Taxation • Gains & losses • G = AR – AB • L = AB – AR (sp – exp) • AB = “Cost” + Improvements – Cost Recovery • Capitalize v. Expense

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

  17. Taxation • Capital gains & losses • Capital asset • Gains • Losses • Short/long-term – holding period • Netting • Preferential rate for LTCG • Capital losses • Recapture • Installment sales

  18. Taxation • Transfer taxes • State inheritance/estate • Federal gift tax • Federal estate tax • Federal GSTT • Basis - §1014/1015 • After tax return

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