Chapter 21 Income Tax Considerations1 New Jersey Real Estate for Salespersons and Brokers By Marcia Darvin Spada Thomson/South-Western Copyright, 2006

Chapter 21 Income Tax Considerations2 Chapter 21 Income Tax Considerations

Chapter 21 Income Tax Considerations3 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 Considerations4 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 Considerations5 Classifications of Income IncomeDefinition Active Salaries-participation Portfolio Interest, annuities, dividends, royalties Passive activity Conducting business-no participation

Chapter 21 Income Tax Considerations6 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 Considerations7 Tax Depreciation Tax Depreciation Business deduction Not for assets for personal use Depreciation schedule 27.5 yrs residential 31.5 or 39 yrs non residential Property sheltered from taxation Recovery of cost or other basis Accounting concept Property may appreciate

Chapter 21 Income Tax Considerations8 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 Considerations9 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