Real Estate Taxation and Risk Analysis Flashcards

Flashcards covering key vocabulary related to real estate taxation and risk analysis.

Investment Property

Real estate held as an investment for the production of income, such as REIT holdings.

Dealer Property

Real estate held for sale to others, such as developers or builders flipping properties.

Depreciable Basis

The total value of an asset that can be depreciated over its recovery period, calculated as Cost Basis minus Land Amount.

Recovery Period

The period over which an asset is depreciated, which varies based on property type (e.g., 27.5 years for residential, 39 years for non-residential).

Capital Gain

The profit earned from the sale of an asset, calculated as Sale Price minus Purchase Price.

1031 Exchange

A tax-deferral strategy where the gain from a property sale is reinvested in a similar type of investment.

Passive Income

Income from real estate rents and royalties from oil and gas rights.

Active Income

Salaries, wages, bonuses, and commissions. Some forms of real estate can count as active income if the owner participates in running the business (e.g. hotel).

Portfolio Income

Interest, dividends, and capital gains.

Business Risk

Uncertainty related to tenant renewals, market rents, downtime, tenant improvements and commissions.

Financial Risk

Risk associated with the cost of debt, financial leverage.

Liquidity Risk

Risk related to the holding period and terminal capitalization rates.

Inflation Risk

Risk associated with various growth rates for revenue and expenses.

Management Risk

Risk related to the use of market rate management fees and reimbursements.

Interest Rate Risk

Risk associated with variable rate debt, can be addressed with hedging.

Legislative Risk

Risk arising from changes in laws and regulations, typically evaluated in scenario analysis.

Environmental Risk

Potential liability from environmental hazards, assessed through a Phase 1 environmental report.

Sensitivity Analysis

A method to assess risk by changing a single assumption to see the effect on NPV or IRR (What-if Analysis), or by changing multiple assumptions at once in Scenario Analysis.

Partitioning the IRR

A method of risk assessment that divides the total IRR into operating cash flow and property sale cash flow components.

Coefficient of Variation

A standardized measure of stand-alone risk, calculated as risk per unit of expected return.