REE-4313 Lecture Notes - Lecture 6: Passive Income, Earnings Before Interest And Taxes, Discount Points
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Published on 21 Oct 2018
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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