Spectrus – Investment Real Estate Glossary – D
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- Deferred gain
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In a tax-deferred exchange, the amount of realized gain that is not recognized. Example: Donald
arranged a tax-deferred exchange in which $1 million of gain was realized but not recognized (that
is, it was not currently taxed). The deferred gain of $1 million carries over to the newly acquired
property in the form of a reduced tax basis, to be taxed if and when the newly acquired property is
sold in a taxable transaction.
- Delayed exchange
- A transaction in which a property is traded for the promise to provide a replacement like-kind property in the near future. The Tax Reform Act of 1984 allows investment real estate or real property used in a trade or business to be sold with the tax on the gain deferred, provided replacement property is identified within 45 days and closed within 180 days. Other strict requirements must also be observed.
- Depreciation (tax)
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An annual tax deduction for wear and tear and loss of utility of property. Example: Tax
depreciation allows a tax deduction without a cash payment, thus providing an important benefit
to real estate owners. A tax depreciation deduction may be claimed even when the property's market
value increases. The annual tax depreciation deduction allowed for improvements (land is not
depreciable) is 3.64% of the original cost of the building for rental housing and 2.56% for
commercial and industrial property.
- Depreciation
- Decline in value of an asset. Property depreciation occurs due to general wear and tear.
- Due diligence
This term can be applied in the following ways:
- making a reasonable effort to perform under contract. Example: A prospective homebuyer signed a sales contract contingent on the sale of her present residence. She is expected to use due diligence in marketing her present house.
- making a reasonable effort to provide accurate, complete information. A study that often precedes the purchase of property, which considers the physical, financial, legal, and social characteristics of the property and the expected financial performance; the underwriting of a loan or purchase. Example: The pension fund sent various experts to perform a due diligence study of a property it was considering for purchase. Matters to be considered included the mechanical and electrical systems of the building, local market conditions and competition for the property, and environmental hazards.
- examination of property to detect the presence of contamination. Example: Before lending on a shopping center, the lender insisted on an environmental audit as part of its due diligence.
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