Unit 22 Investing In Real Estate

Question 1

Define accelerated cost recovery system (ACRS)

Answer 1

Method for claiming tax deductions for certain property purchased before 1987 in which it was possible to claim greater deductions in the early years of ownership, gradually reducing the amount deducted in each year of useful life. 431

Question 2

Define Adjusted Basis

Answer 2

basis The financial interest that the Internal Revenue Service attributes to an owner of an investment property for the purpose of determining annual depreciation and gain or loss on the sale of the asset. If a property was acquired by purchase, the owner’s basis is the cost of the property plus the value of any capital expenditures for improvements to the property, minus any depreciation allowable or actually taken. This new basis is called the adjusted basis. 431 (Kyle 521)

Question 3

Define appreciation

Answer 3

An increase in the worth or value of a property due to economic or related causes, which may prove to be either temporary or permanent; opposite of depreciation. 427

Question 4

Define Boot

Answer 4

boot Money or property given to make up any difference in value or equity between two properties in an exchange. 432

Question 5

Define capital gain

Answer 5

Profit earned from the sale of an asset. 431

Question 6

Define Cash Flow

Answer 6

cash flow The net spendable income from an investment, determined by deducting all operating and fixed expenses from the gross income. When expenses exceed income, a negative cash flow results. 428

Question 7

Define cost recovery

Answer 7

An Internal Revenue Service term for depreciation. 430

Question 8

Define Depreciation

Answer 8

depreciation (1) In appraisal, a loss of value in property due to any cause, including physical deterioration, functional obsolescence, and external obsolescence. (2) In real estate investment, a deduction for tax purposes taken over the period of ownership of income property, based on the property’s acquisition cost. 305, 431

Question 9

Define Equity Buildup

Answer 9

equity buildup That portion of the loan payment directed toward the principal rather than the interest, plus any gain in property value due to appreciation. 429

Question 10

Define Exchanges

Answer 10

exchange A transaction in which all or part of the consideration is the transfer of like-kind property (e.g., real estate for real estate). 432

Question 11

Define Income Property

Answer 11

income property Property held for current income as well as a potential profit upon its sale. 427

Question 12

Define Inflation

Answer 12

inflation The gradual reduction of the purchasing power of the dollar, usually related directly to increases in the money supply by the federal government. 428

Question 13

Define Intrinsic value

Answer 13

intrinsic value An appraisal term referring to the value of a property unaffected by a person’s personal preferences. 428

Question 14

Define Leverage

Answer 14

leverage The use of borrowed money to finance an investment. 429

Question 15

Define Liquidity

Answer 15

liquidity The ability to sell an asset and convert it into cash, at a price close to its true value, in a short period of time. 427

Question 16

Define Pyramiding

Answer 16

pyramiding The process of acquiring additional property by refinancing property already owned and investing the loan proceeds in additional properties. 430

Question 17

Define Real estate investment trust (REIT)

Answer 17

real estate investment trust (REIT) Trust ownership of real estate by a group of individuals who purchase certificates of ownership in the trust, which in turn invests the money in real property and distributes the profits back to the investors free of corporate income tax. 433

Question 18

Define Straight-line depreciation

Answer 18

straight-line depreciation Depreciation taken periodically in equal amounts over an asset’s useful life. 431 (Kyle 541)

Question 19

Define Syndicate

Answer 19

syndicate A combination of people or firms formed to accomplish a business venture of mutual interest by pooling resources. In a real estate investment syndicate, the parties own and/or develop property, with the main profit generally arising from the sale of the property. 433 (Kyle 542)