Tax laws that limit the amount of deductible tax losses an investor can claim based on their tangible financial risk in an investment. These rules were specifically extended to real estate investments by the 1986 Tax Reform Act.
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.
A capital loss occurs when an investor sells a capital asset at a price lower than its purchase price. The capital loss is the difference between the selling price and the purchase price of the asset.
The Cash Method is a straightforward accounting technique in which revenue and expenses are recorded when they are actually received or disbursed. It is most commonly used by small businesses and individual taxpayers for its simplicity and ease of use.
Depletion refers to a non-cash deduction that accounts for the reduction in value of an income-generating natural resource, such as minerals, oil, gas, or timber.
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 (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.
An Investment Tax Credit (ITC) is a tax incentive that enables businesses to deduct a certain percentage of investment costs from their income tax liability.
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.
An ordinary loss is a loss that is deductible against ordinary income for income tax purposes and is generally more beneficial to a taxpayer than a capital loss, which has limitations on deductibility.
Prepaid interest refers to interest that is paid in advance of the time it is earned. It's typically associated with mortgage loans where borrowers pay interest upfront to reduce future interest payments.
A primary residence, often referred to as a principal residence, is the main home where an individual resides most of the time. This contrasts with a second home or vacation home.
Repairs refer to work performed to restore a property to its original condition without extending its useful life. This term is distinct from capital improvements, which add value or extend the life of the property. In the context of income property, repairs are considered an operating expense for accounting and tax purposes.
A second mortgage is a subordinated lien created by a mortgage loan that enhances financing options by reducing the cash down payment requirement during a property purchase or refinancing.
Straight-Line Depreciation is a method that applies equal annual reductions in the book value of a property. It is primarily used in accounting for replacement and tax purposes.
The Sum-of-Years'-Digits (SYD) depreciation method is a technique used in accounting to allocate the cost of an asset over its useful life in an accelerated manner. This method results in higher depreciation expenses in the earlier years and lower expenses in the later years.
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.
A tax-deductible expense is a type of expenditure that can be subtracted from taxable income, thus reducing the amount of income that is taxed. This helps in lowering the overall tax liability for individuals and businesses.
A tax deduction is an expense that can be subtracted from an individual or entity's gross income to reduce the amount subject to tax.
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.
