CA_Principles_13[1]

CA_Principles_13[1] - Principles of California Real Estate...

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1 Lesson 13: Federal Income Taxation and Real Estate Principles of California Real Estate Basic Taxation Concepts Progressive tax » Progressive tax : The higher a person’s income, the higher their tax rate; not only do they pay a higher tax amount, they pay a greater percentage of their income in taxes than a person with a lower income. » Federal income tax is a progressive tax. Basic Taxation Concepts Progressive tax » A progressive tax contrasts with a: Proportional tax : All income levels taxed at same rate. and Regressive tax : Higher income levels taxed at lower rate than lower income levels.
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2 Basic Taxation Concepts Tax brackets » Tax rates increase in uneven steps called tax brackets . » An additional dollar earned may be taxed at a higher rate than the dollars earned before it, once it crosses the line in to another income bracket. Marginal tax rate: Rate that applies to the next dollar a taxpayer earns. Basic Taxation Concepts Income » For taxation purposes, income includes more than just salary or wages. » Income is any economic benefit realized by a taxpayer, unless excluded by tax code. Basic Taxation Concepts Deductions and tax credits » Deductions : Certain expenses may be subtracted from income before it is taxed. Example: mortgage interest deduction » Tax credits : Credits are subtracted directly from the amount of tax owed . A tax credit generally represents a greater savings than a tax deduction.
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3 Basic Taxation Concepts Gains and losses » A gain results when someone sells an asset for more than she invested in it. » A gain is taxable income, unless the tax code provides a specific exception. Basic Taxation Concepts Gains and losses » If property is sold for a loss, the loss is usually not deductible, unless it is connected with: the taxpayer’s trade or business a transaction entered into for profit theft or casualty loss of the taxpayer’s property. Basic Taxation Concepts Capital gains and losses » Capital gain or loss : A gain or loss that results from the sale of a capital asset . Capital asset: Includes property held for personal use or investment purposes
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Basic Taxation Concepts Capital gains and losses » Capital gains are taxed at a lower rate than ordinary income. » Capital losses also receive special tax treatment. » Even though a loss on a home or other property held for personal use is a capital loss, it isn’t deductible. » Capital losses on property held for investment purposes are deductible. Basic Taxation Concepts Capital gains and losses » Capital gains and losses are netted against each other, resulting in either a net gain or loss . If net gain, taxed as capital gain. If net loss, may be deducted.
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CA_Principles_13[1] - Principles of California Real Estate...

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