The Accelerated Cost Recovery System (ACRS) is a method of depreciation that spreads the deduction of a property’s cost over specific periods. Originating from the Economic Recovery Tax Act of 1981 and later modified, ACRS was devised to provide significant tax incentives.
The Accelerated Cost Recovery System (ACRS) was a method used to depreciate property for tax purposes at an accelerated rate. Introduced by the Economic Recovery Tax Act of 1981 (ERTA), it allowed for quicker cost recovery of investments in tangible property.
Adjusted Basis refers to the net cost of an asset after adjusting for various factors such as improvements, depreciation, and damage, and is primarily used for calculating capital gains or losses upon the sale of the asset.
The adjusted tax basis refers to the original cost or other basis of property, reduced by depreciation deductions and increased by capital expenditures.
The Age-Life Method of Depreciation is a technique that estimates all forms of depreciation sustained by an asset, based on the effective age of the property or component, divided by the total economic life of the property or component.
An allowance in real estate is an accounting term used to designate funds or provisions reserved to address expected expenses, occurrences, or losses.
Amortization of Deferred Charges refers to the procedure that allocates the cost of intangible assets to accounting periods, similar to how depreciation handles tangible assets. This concept is especially relevant for costs incurred to arrange loans and leases, which are typically written off over the term of the agreement.
Appraisal by Summation, also known as the Cost Approach, is a real estate valuation method that determines the value of a property by adding the land value to the depreciated value of any improvements (such as buildings) made on it.
Basis (Tax) represents the starting point from which gains, losses, and depreciation deductions are computed. It is generally the original cost or purchase price of an asset.
Bonus depreciation refers to an additional deduction that allows businesses to depreciate a larger portion of the cost of qualifying property in the first year it is placed in service. This is in addition to Section 179 expensing and the standard first-year depreciation.
Book value represents the carrying amount of an asset as recorded on the company's balance sheet. It is generally the purchase price of the asset plus any capital improvements minus accumulated depreciation.
A Burned-Out Tax Shelter refers to a real estate investment that was once advantageous for providing large income tax deductions but has lost its tax-sheltering benefits over time due to the reduction and eventual nil in depreciation deductions and the decrease in interest deductions as mortgage payments increasingly cover the principal.
Capital Expenditure (CapEx) refers to the funds used by an organization to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment. These expenditures are critical for the long-term growth and operational efficiency of an organization and are generally depreciated over their useful life.
Capital improvements, also referred to as capital expenditures, are significant upgrades, enhancements, or additions to an existing property that increase its overall value, extend its useful life, or adapt it to new uses.
The Cost Approach is a real estate appraisal method that estimates the value of a property by calculating the cost of reconstructing the structure on the same piece of land. This approach considers the depreciated reproduction or replacement cost of improvements, plus the market value of the site.
Cost basis refers to the original value of a property for tax purposes, adjusted over time for improvements, deprecation, and other related factors. This concept is fundamental in real estate transactions for determining capital gains or losses upon the sale of the property.
Cost segregation is a tax strategy that helps businesses and property investors accelerate depreciation deductions. By identifying personal property assets and separating them from real estate, businesses can apply shorter depreciation periods to these assets, thereby realizing greater tax depreciation deductions in the early years.
The 'Cost to Cure' is the amount of money required to remedy a cause of depreciation in a property. A curable defect is one for which the cost to correct is less than the value added by the correction.
Curable Depreciation refers to a type of property deterioration that can be corrected at a cost that is less than the value it will add to the property.
Depreciable basis refers to the portion of an asset’s cost that can be depreciated over its useful life for tax purposes. It is an essential concept in the calculation of depreciation expenses, influencing both financial reporting and tax liabilities.
Depreciated cost, also known as book value or adjusted tax basis, represents the value of a property after accounting for depreciation – the gradual reduction in the value of an asset over time. This figure is used in financial reporting and tax assessments to reflect the lowered worth of a property due to wear and tear, deterioration, or obsolescence.
Depreciation (Accounting) refers to the method of allocating the cost of a tangible asset over its useful life. It is an accounting technique used to account for the gradual wear and tear, aging, or decrease in the utility of an asset.
Depreciation, in real estate appraisal, refers to the reduction in a property's value due to wear and tear, age, or other factors, which impacts its overall market value.
Depreciation (Appraisal) is a charge against the reproduction cost (new) of an asset for the estimated wear and obsolescence. This type of depreciation can be categorized as physical, functional, or economic.
Depreciation (Tax) refers to an annual tax deduction for wear and tear and loss of utility of property. It allows property owners to account for the decrease in value of their real estate assets over time.
Double Declining Balance (DDB) is an accelerated method of depreciation used for tax purposes, applying twice the straight-line depreciation rate to the remaining book value of an asset.
Economic obsolescence refers to the decrease in property value caused by external factors, such as environmental changes or new developments. It is also known as external obsolescence or environmental obsolescence.
Effective age refers to the age of a property based on the wear and tear it has sustained, as opposed to its actual chronological age.
FF&E stands for Furniture, Fixtures, and Equipment, encompassing all movable property that is used in business operations and can include everything from chairs and desks to lighting and cabinetry.
Fixed assets, also known as tangible assets or property, plant, and equipment, are long-term physical assets held by a business for use in its operations and not for sale. These assets provide value to the operations of a company over several years.
Functional obsolescence is an appraisal term that refers to the loss of value from all causes within a property except those due to physical deterioration.
Funds From Operations (FFO) is a measure of the profitability of a Real Estate Investment Trust (REIT) derived from net income adjusted for non-cash items such as depreciation and amortization. It is widely regarded as a more accurate indicator of a REIT's performance than GAAP net income.
Incurable depreciation or obsolescence refers to a defect in a property that cannot be rectified or is not financially feasible to rectify, often due to fundamental structural issues.
The Internal Revenue Code (IRC) is a comprehensive set of tax laws enacted by the United States Congress to specify how various types of income are to be taxed and what deductions are allowed. It serves as the foundation for the country's federal tax laws and is critical in shaping tax policy and administration.
A Low-Income Housing Limited Partnership (LIHLP) is a partnership formed to fund and manage housing for low-income tenants. It offers investors potential returns primarily through tax deductions and credits rather than significant annual cash distributions.
The Modified Accelerated Cost Recovery System (MACRS) is the current tax depreciation system in the United States permitting a faster write-off of the capital expenses of tangible personal and real property. Enacted by the Tax Reform Act of 1986, MACRS allows for greater accelerated depreciation, with the intention of encouraging investment in business assets by offering a larger depreciation deduction in the early years of an asset’s life and lower deductions later on.
The Modified Accelerated Cost Recovery System (MACRS) is a method of depreciation used for income tax purposes in the United States. It allows for the accelerated depreciation of property over specified recovery periods.
The original cost represents the total purchase price initially incurred for acquiring an asset, including any associated acquisition expenses. This figure is essential for various financial calculations and reporting, forming the baseline for depreciation, amortization, or gain and loss assessments.
Phantom taxable income occurs when reported taxable income exceeds actual cash flow, often due to tax-related factors such as depreciation deductions that have been fully utilized.
Qualified Leasehold Improvement Property (QLIP) refers to improvements made to an interior portion of nonresidential real property by a lessor or lessee under a lease, which may be eligible for certain depreciation benefits.
Replacement Value Protection is an insurance policy feature that provides for the reimbursement of the full cost of lost or damaged property, less the policy’s deductible amount, without deduction for depreciation.
Reproduction cost is the expense involved in duplicating a property exactly, denoting the total amount required to construct a replica of the structure using the same materials, design, and workmanship as the original.
Residential properties are real estate intended for housing purposes. This term encompasses owner-occupied homes and rental properties provided they are used as dwellings, excluding transient accommodations like hotels and motels.
Salvage value is the estimated value an asset will have at the end of its useful life. It is an important concept in accounting and real estate for calculating depreciation.
Section 167 is the part of the Internal Revenue Code (IRC) that deals with depreciation for property, including real estate. This section provides guidelines for the allowance of depreciation deductions for tax purposes.
Section 168 of the Internal Revenue Code outlines the Accelerated Cost Recovery System (ACRS) and the Modified Accelerated Cost Recovery System (MACRS), which are methods of calculating depreciation for tax purposes.
Section 179 of the Internal Revenue Code allows businesses to immediately deduct the cost of qualifying equipment, rather than capitalizing and depreciating the asset over a long period. This is particularly beneficial for small businesses, enabling them to reduce their tax liability quickly.
The Straight-Line Recapture Rate is a component of the capitalization rate that accounts for the annual loss in value of a wasting asset by assuming equal depreciation each year over the asset's useful life.
Sum-of-Years’-Digits (SYD) is an accelerated depreciation method that segments the depreciation of an asset by applying larger deductions at the beginning of the asset's useful life and smaller deductions towards the end.
Tax Basis, also known as Basis (Tax), refers to the original value of a property or asset for tax purposes, with potential adjustments over time reflecting improvements, depreciation, or other factors.
Tax preference items are specific types of income or deductions that are added to gross income to calculate the Alternative Minimum Tax (AMT). These items can include types of depreciation on real estate, among other things.
A tax shelter is an investment strategy that provides tax advantages by generating more after-tax income compared to before-tax income. These investments can produce before-tax cash flow while creating tax losses that can shield income from other sources from taxation.
Tax-sheltered income refers to income received, particularly from rental property, that is not subject to taxation, creating a tax benefit for the property owner. It typically occurs when depreciation expense claimed for income tax purposes exceeds mortgage principal payments.
Taxable income or loss is the amount of income or loss a taxpayer reports on their tax return from various sources, including rental real estate. It involves subtracting various allowable deductions from gross income to determine the net amount subject to taxation.
A wasting asset is a property, resource, or investment that diminishes in value over time due to inherent factors like physical deterioration, depletion, or obsolescence.
Wear and tear refers to the gradual deterioration of property as a result of regular use, weathering, and age. This inevitable process affects the condition and value of various property assets over time.
A write-down is an accounting term that describes the reduction in the book value of an asset when its fair market value falls below its carrying value on the balance sheet. This is often recorded to reflect a decrease in the asset's value due to obsolescence, damage, or market conditions.
A write-off is an accounting action where an asset's diminished value is removed from the financial books, reflecting that it is no longer expected to generate economic benefit.
