REE-4313 Lecture Notes - Lecture 6: Passive Income, Earnings Before Interest And Taxes, Discount Points

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- Three Types of Income Subject to Taxation
o Active Income
+ Salary Income
+ Consulting Income
+ Sales Commissions
= Net Active Income
Taxed at ordinary rates
o Portfolio income
+ Interest
+ Dividends
+ Annuities
+ Cap Gains on Stocks
- Interest incurred in producing income
= Net Portfolio Income
Taxed at ordinary or capital gain rates
o Passive Income
+ Taxable income from business in which no “material participation”
+ Any rental income
- Any expenses from producing rental income
= Net Passive Income
Ordinary, capital gain, and/or recapture rates
- Tax Classifications
o Four Basic Tax Classifications for Real Estate
RE held as a personal residence
Will note major items
RE held for use in trade or business
RE held for investment (speculative for gain)
Property used in a trade or business is not investment property.
This includes non-rental property purchased for speculation, such
as raw land
RE held for sale to others (dealer property)
Dealers are engaged in the business of selling real estate to
customers with the purpose of making a profit from those sales
o Tax Classifications are important because they:
Determine if depreciation is allowed
Personal residences & “dealer” property can’t be depreciated
Investment property is generally not depreciated
May affect taxes due on sale
Net gains from sale of trade or business property (held for a year)
are taxed at capital gains rates
Net tax losses on “trade or business” property are deducted
against passive income, with limits on deductions against other
income
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