REE TEST 2 1 Four classes of real property and how it is treated by IRS pg 33 a Held as personal residence b Held for sale to others dealer property c Held for use in a trade or business trade or business property i Income property investments owner who hires a property manger for DTD Ops owner of restaurant d Held as an investment for the production of income investment property i Unimproved land and property subject to a net lease passive 2 Three types of income the IRS recognizes 34 investments a Active income from salaries wages commissions fees and bonuses Taxed at the ordinary tax rate b Portfolio income interest and dividends and capital gains from stock bond and other investments c Passive activity income from trade and business activities in which the taxpayer does not materially participate Real estate rental activities 3 Straight line depreciation a residential income property currently placed in service could be depreciated over 27 5 years nonresidential income property over no less than 39 years 1 recovery period a allowances that are deductible directly from the taxes owed 4 Tax credit 5 Tax shelter a occurs when the cash received is not taxed due primarily to mortgage interest and depreciation deductions to the taxable income 6 Capital gains are subject to a maximum 20 rate however the maximum rate on ordinary income is 39 6 Installment sale 7 a the seller allows the buyer to pay the purchase price over a number of years 8 Like kind exchange a section 1039 transfer 250 000 exemption if single 500 000 if married on reverse mortgage Owners may exchange their properties and avoid paying capital gains at the time of transaction 9 Real estate Investment trust pg 46 LLC not liable beyond investment a Is a corporate form of ownership engaged in real estate investment it avoids taxation at the corporate level if specific requirements are satisfied LLC stands for Limited Liability Company 10 Management responsibilities and relationships pg 61 a Portfolio managers advise owners of investment portfolios about the types of investments needed to achieve the portfolio s risk return objectives b Asset managers analyze investment opportunities assist in acquiring assets assure that the assets remain productive during ownership and assist in the disposition of assets c Property managers oversee the day to day ops of the asset rent collection accounting ops maintenance 11 Nature of leases pg 63 residential especially a Leased fee estate owners rights b Leasehold estate tenants rights c Rights and obligations of owners and tenants keep property safe and in good condition d Residential leases possession and use of property maintenance and repairs lessors right of entry lessees right of assign and sublet 12 Difference of assignment and sublet a Assignment transfers the lessees rights to new lessees Original tenants remain liable under lease assignments unless released by the landlords b A sublet involves the sale of part of the lessees rights Original lessees become lessors and the parties now have a sandwich leasehold 13 Gross lease lessors pay all operating expenses a Lessees pay some or all operating expenses in a net or net net lease net property taxes net net prop taxes and insurance b Lessees pay all operating expenses including repairs and maintenance in an absolutely net net net net or triple net lease 14 Lease contracts pg 64 a Shopping center lease exceeds other lease structures because of the trilateral agreement between the tenant owners and other tenants in the center b Ground lease are leases of vacant land or of the land portion of an improved parcel of real estate Usually 20 to 99 years and usually triple net leases 15 2nd amendment eminent domain chapter 9 pay compensation 16 Chap 12 three general approaches to estimating real value a Sales comparison approach b Cost approach older c Income capitalization approach larger 17 Pg 107 graph a Transaction Price b Conditions of sale c Financing terms d Normal sales price e Market conditions f Market adjusted normal sale price g Location h Physical characteristics i Legal characteristics j Use k Nonrealty items l Final adjusted sale price 18 Functional obsolescence pg 109 a Occurs when the usefulness of the building is limited when compared to newer building 19 Reproduction and replacement cost pg 108 a Reproduction cost is the cost to construct the building today replicating it in exact detail Applied by appraisers b Replacement cost is the cost required to construct a building of equal utility using modern construction techniques materials and design 20 Physical deterioration long lived and short lived carpeting a Short lived have lives shorter than buildings carpeting appliances b Long lived consists of the main parts of the buildings itself foundation roof structure 21 External obsolescence a Denotes the loss of a building s value through influences external to the property odors sites traffic noise incurable 22 V I R pg 116 value income capitalization rate 23 Pg 118 simple mortgae equity analysis 2 5 6 a Ro mRm 1 m Re i M the loan to loan value ration ii Rm the mortgage capitalization rate iii Re the equity capitalization rate 24 Land contract pg 126 a Occurs when seller financing is provided and the title to the property changes hands when some percentage of the loan is repaid 25 Equity of redemption a The legal right of delinquent borrowers to pay the outstanding balance interest and court costs to redeem the equity in their property The equity right of redemption period occurs prior to the foreclosure sale 26 Secondary mortgage market 123 133 40 a Mortgages may be transformed from a pool of mortgages into a mortgage backed security and sold to multiple investors b Where mortgage loans are purchased from local originators a Loan origination market the location where borrowers and lenders 27 Primary mortgage market 133 negotiate mortgage terms 28 Conforming conventional loan 133 a One that meets the underwriting standards required for purchase in the secondary market by Fannie Mae Federal National Mortgage Association or Freddie Mac Federal Home Loan Mortgage Corp 29 Fixed payment mortgage 134 a Most common 30 year fixed payment mortgage represents about 50 60 percent of residential loans 30 Don t do interest only they suck and are stupid 31 Chapter 15 5 6 7 32 Refinancing decision 136 a Borrowers refinance when market mortgage rates are 150 to 200 basis points less than the borrowers current mortgage rate Most