Glossary

By Jason Watson, CPA
Posted Sunday, May 25, 2025

We toss around a lot of terms and not always in the best order. As such, here is a quick glossary-

Adjusted Basis

Adjusted basis refers to any adjustments made to the original purchase price of an asset over time usually because of depreciation.

Bonus Depreciation

An accelerated method allowing large amounts of first-year expensing of qualifying property. For the 2025 tax year, bonus is 40%.

Capital Expenditure

A cost that improves or extends the life of a property and must be depreciated unless a capitalization exception applies.

Capitalization

The process of adding a cost to the asset’s basis rather than deducting it immediately. There are several safe harbors and other provisions that can circumvent capitalization (since most taxpayers are not a fan of being forced to capitalize certain expenditures).

Cost Segregation Study

A report that analyzes a building and its components, and separates certain items into 5-, 7-, 15-year asset classes. This allows for accelerated depreciation since depreciation schedules shrink from either 27.5 or 39.0 years to something shorter. It is generally a cash flow play.

De Minimis Safe Harbor

IRS rule allowing small-dollar purchases (under $2,500) to be expensed immediately.

Depreciable Basis

Depreciation is a measurement of the “useful life” of a business asset, such as machinery or a building, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Depreciable basis is the portion of the asset that is available for depreciation (i.e., land is not depreciated).

Depreciation Recapture

If you sell or otherwise dispose of depreciated business property including real estate property for a gain (the sale price exceeds the adjusted cost basis), depreciation recapture permits the IRS to take back (i.e., “recapture”) some of the tax benefits you received over the years through depreciation deductions. As such, depreciation might be a little tax bomb or IOU to the IRS.

Fixed Asset Listing (FAL)

Fixed assets are long-term assets. This means the assets have a useful life of more than one year. Fixed assets include property, plant, and equipment (PP&E) and are recorded as such on your tax returns (and financial statements should you have a balance sheet).

Internal Revenue Code (IRC)

The IRC can be found in Title 26 of the United States Code or “26 USC.”

K-1

A K-1 is similar to a W-2 since it reports income and other items for each member, partner, shareholder, owner or beneficiary. It is coded to tell the IRS how the business activities should be treated. A K-1 is generated by an entity since the entity is passing along the income tax obligation to the K-1 recipient (hence the concept pass-through entity, or PTE).

Nexus

State tax nexus is an important concern for real estate investors that have a multistate presence because of activities in other states. Nexus is a threshold issue that must be evaluated to determine whether an activity has a tax filing obligations in a particular jurisdiction. State tax nexus refers to the amount and type of business activity that must be present before the business is subject to the state’s taxing authority. State tax nexus considerations differ by tax type and jurisdiction, and there has been limited guidance from tax authorities as to when nexus conclusively exists. Various business and real estate activities could create state tax nexus for sales and use tax, income tax or franchise tax.

Non-Residential Property

Property depreciated over 39.0 years, often applies to short-term rentals where the average guest stay is less than 30 days or commercial buildings including dormitories and nursing homes. Being considered non-residential changes a few things namely Qualified Improvement Property and the intersection with Section 179 expensing.

Operating Agreement

A legal document outlining ownership and management of an LLC.

Out of Service

The point at which an asset (rental property) is no longer being held for the production of income. This is in turn limits deductions and material participation time.

Partial Asset Disposition (PAD)

Tax provision allowing loss recognition on replaced property components.

Passive Activity Loss Limitations

Generally, passive activity losses that exceed the passive activity income are disallowed for the current year. You can carry forward disallowed passive losses to the next taxable year. Passive activities include trade or business activities in which you don’t materially participate.

You materially participate in an activity if you’re involved in the operation of the activity on a regular, continuous, and substantial basis. In general, rental activities, including rental real estate activities, are passive activities even if you materially participate. However, rental real estate activities in which you materially participate aren’t passive activities if you qualify as a real estate professional.

Placed In Service

This is not the date the property is first rented. An asset (rental property) is “in-service” when it is ready and available for occupancy, and held out for rental use through advertising and related efforts. Having your rental property be considered in-service is huge for depreciation, operating expense deductions and material participation. The tax code reads in part, “property is first placed in service when first placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity.”

Real Estate Professional Status (REPS)

If certain conditions are met, a taxpayer can be considered a real estate professional which changes the color of money from inherently passive to non-passive, and losses are not limited by passive activity loss limitations.

Safe Harbor

A safe harbor refers to a provision that provides protection from liability or penalties under specific situations or conditions. Commonly, safe harbors present numbers or other “bright lines.” Rather than defending your tax position with facts, circumstances and arguments, you can defend the position by meeting or exceeding a list of criteria. There are several safe harbors within the tax code.

Section 1245 Property

Personal property that is subject to the allowance of depreciation.

Section 1250 Property

Real property such as rental properties and commercial buildings are subject to the allowance of depreciation. It does not include tangible or intangible personal property or land.

Short-Term Rental

A rental property where the average guest stay is fewer than 30 days. For the loophole, average guest stay needs to be 7 days or fewer.

Step-up in Basis

The step-up in basis provision adjusts the value, or “cost basis,” of an inherited asset (stocks, bonds, real estate, etc.) when it is passed on, after death. This often reduces the capital gains tax owed by the recipient. The cost basis receives a “step-up” to its fair market value, or the price at which the good would be sold or purchased in a fair market.

Treasury Regulations (“the regs”)

Treasury regulations (commonly referred to as federal tax regulations) provide the official interpretation of the IRC by the Department of the Treasury and give directions to taxpayers on how to comply with the IRC’s requirements. Also referred to as Code of Federal Regulations, or “26 CFR.”

Unadjusted Basis

Unadjusted basis is the initial value assigned to an asset. It includes the cash cost or price of an asset, any liability assumed to acquire the asset, any asset the purchaser gave to the seller as part of the transaction, and any purchase expenses incurred to acquire the asset.

Vacant Property

A rental property that is in service but temporarily without tenants.