The 10 Terms you Must know to pass the series 22 exam

Here are 10 terms you must know in order to successfully complete the series 22 exam: 

1031 exchange

Internal Revenue Code 1031 allows  investors to exchange certain types of properties without recognizing a capital gain or Capital loss on the exchange. The property exchange must include properties of like-kind and must be held for investment purposes or for the use in the taxpayers business or trade.  A 1031 exchange is applicable to investments in real estate. Investments in Securities such as stocks bonds interest in limited Partnerships or other evidence of ownership interest or indebtedness do not qualify for the 1031 Exchange exemption

Boot 

The term boot is used to describe the value of a non like kind property received as part of a 1031 exchange. The fact that the Exchange includes a non like property does not disqualify the exchange, it merely results in a partially tax-deferred Exchange.  That is to say that the exchange will not be 100% tax-deferred.

Cash flow

For the purpose of the series 22 exam, cash flow is, cash provided from operations  minus expenses, and prior to deducting depreciation, depletion or other non-cash allowances.  The deduction of all cash expenses including wages, Insurance, Debt Service, Capital Improvements ,repairs, maintenance and replacements will be made to determine funds from operations. Should the partnership have outstanding leases made to builders sellers or other parties, cash flow will also include lease payments received on net leases  prior to depreciation. 

Depreciation

Depreciation is an accounting method used to amortize the purchase price of an asset over the  estimated useful life of the asset. Depreciation is non-cash charge that reduces the value of a fixed asset on the balance sheet of the entity.  The depreciation is then taken as a deduction to taxable income on the income statement. There are several types of depreciation schedules that may be used to reduce the value of an asset over time.  Two of the more popular methods are straight-line depreciation and modified accelerated cost recovery. With the straight-line method the price of the asset is depreciated in equal amounts over its useful life.  When modified accelerated cost recovery is used a large percentage of the asset’s price is recovered in the early years of its use. This creates large deductions in the early years and smaller deductions in later years of the asset’s useful life. 

Depletion

Depletion is an accounting method used to reduce the value of natural resources Carried on the balance sheet. Natural resources such as gas and oil cannot be depreciated they must be depleted. The depletion allowance is used to reduce the value of the reserves to reflect the fact that, at some point, all of the natural resources will have been extracted, and the reserves extinguished. Depletion like depreciation is a non-cash charge that reduces the value of the natural resource  On the balance sheet with the resulting depletion charge being taken against income to reduce tax liability.

Dissenting limited partner

Any person who is the owner or holder of a beneficial interest in a limited partnership subject to a proposed rollup transaction in which the partnership will be combining or merging with another limited partnership, Who at the time votes are solicited files an objection to the proposed roll up or merger transaction.

Funds From operations 

When reviewing the financial performance of a limited partnership, Funds from operations will provide investors with the details of the partnership’s economic performance.  Funds from operations is calculated by adding depreciation, amortization or depletion allowances back to the earnings of the partnership. Once the appropriate add backs have been calculated, any capital gains realized on the sale of assets are subtracted to determine funds from operations for the partnership.. 

General partner

The general partner of a  limited partnership is the individual or entity who provides management expertise and is responsible for the day-to-day operations of the limited partnership.  While the general partner may be a natural person, more often than not the general partner is a corporation or other legal entity that is designed to provide a level of legal protection to the natural persons who operate the partnership 

Limited Partner

A limited partner is an investor in a limited partnership who has provided Capital to the partnership in exchange for an economic interest in the partnership.  A limited partner’s liability is generally limited to the amount of the partner’s investment. A limited partner may not exercise any management over the partnership  operations, nor may they seek to control the actions of the general partner. If a limited partner exercises management over the partnership’s operations or controls the general partner, the limited partner will  lose their classification as a limited partner and will be deemed to be a general partner of the partnership. 

Master limited partnership

A master limited partnership combines the tax benefits of a partnership with liquidity provided by the public exchanges. The mlp’s must receive  at least 90% of their revenue from production, processing, storage, or transportation of Natural Resources such as oil and gas. An MLP will also qualify if it owns real property designed to produce rental income, or in some cases, if it provides financial management services.  Master limited partnerships are required to make quarterly distributions to limited partners in the form of dividends. 

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