POR Texas 2 Unit 6 Real Estate Investments

Investors can use the first $25,000 of losses from rental property to offset income from any source provided the investor actively participates in the management of the property and has taxable income before the deduction of no more than

$100,000. The deduction is reduced by $0.50 for every dollar of income over $100,000 and is thus eliminated completely when income reaches $150,000.

Jennifer is an investor who purchased a single-family property for $200,000 for use as a rental property. She is now selling the property for $300,000. Jennifer remodeled the kitchen at a cost of $8,000 and replaced the roof for $10,000 before selling it. The improvements have depreciated by $20,000 while Jennifer owned the property. Jennifer will pay a commission of 7% and closing costs of $500. What is Jennifer's adjusted basis?

$198,000. The adjusted basis is equal to the original cost plus improvements minus depreciation. In this case, $200,0000 + $18,000 ‒ $20,000 = $198,000.

If investor A exchanges a building worth $200,000 for investor B's building worth $150,000, a car worth $20,000, and $30,000 in cash, investor A has a taxable boot of

$50,000. To qualify as a tax-deferred exchange, the properties involved must be of like kind. Any additional capital or personal property included with the transaction to even out the exchange is considered boot, and the party receiving it is taxed at the time of the exchange. In this example, the taxable boot is $50,000 ($20,000 car + $30,000 cash).

Why is it risky for an investor to purchase raw land with the expectation that there will be growth in the area in the future?

Quite often, an investor speculates in purchases of either agricultural (farm) land or undeveloped (raw) land located in what she expects will be a major path of growth. In these cases, however, the property's intrinsic value and potential for appreciation are not easy to determine; therefore, this type of investment carries with it many inherent risks.

An investment syndicate is to be set up to allow all members to share equally in the managerial decisions, profits, and losses involved in the venture. Which of the following is the business structure BEST suited to these investors?

a general partnership. A general partnership is organized so that all members of the group share equally in the managerial decisions, profits, and losses involved with the investments. In a limited partnership, limited partners lose only as much as they invested, nothing more.

What is an equity REIT?

a pool of large-scale income properties wherein shares are sold to investors. Much like mutual fund operations, an equity real estate investment trust (REIT) pools an assortment of large-scale income properties and sells shares to investors. This is in contrast to a real estate syndicate, through which several investors pool their funds to purchase one particular property. An equity REIT also differs from a syndicate in that the REIT realizes and directs its main profits through the income derived from the various properties it owns rather than from the sale of those properties.

Which of the following is similar to a mutual fund?

an equity REIT. Much like mutual fund operations, equity REITs pool an assortment of large-scale income properties and sell shares to investors.

An investor may defer federal income taxes on a portion of the gain on the sale of a property, provided all sales proceeds are not received during the year of the sale. This describes

an installment sale. Payments from the sale of a property must be received over two or more years to qualify for an installment sale. Income tax is paid each year based on the amount received during that year.

Operating expenses include all of the following EXCEPT

debt services. The cash flow produced by any given parcel of real estate is determined by at least three factors: (1) amount of rent received, (2) operating expenses, and (3) method of debt repayment. Operating expenses include general maintenance of the building, repairs, utilities, taxes, and tenant services (such as security systems).

What is the difference between an equity REIT and a real estate syndicate?

equity REITs pool properties and sell shares to investors, while real estate syndicates pool several investors' funds to purchase one property. Much like mutual fund operations, equity REITs pool an assortment of large-scale income properties and sell shares to investors. This is in contrast to a real estate syndicate, through which several investors pool their funds to purchase one particular property.

Sara is a real estate investor; she owns several homes in Galveston that she rents out on both short- and long-term leases. She has mortgages on the homes that she pays monthly. What is the portion of her mortgages that is applied to the principal for each loan considered?

equity buildup. The portion of an investor's mortgage payments applied to the principal represents equity buildup and increases the value of the investor's ownership interest in the asset with each remittance.

In what type of partnership do all members share equally in the managerial decisions, profits, and losses involved with the investment?

general partnership. A general partnership is organized so that all members of the group share equally in the managerial decisions, profits, and losses involved with the investment. In a limited partnership, limited partners lose only as much as they invested, nothing more.

Joan has two rental properties that are exactly the same size. One is a new duplex near downtown Austin, and the other is a duplex built in 1971 in Manor. What happens to the duplex in Manor if she can't rent it out?

if rent cannot cover expenses, there will be a negative cash flow. If the cash flow from rents is not enough to cover all expenses, a negative cash flow will result. To keep cash flow high, an investor should keep operating expenses reasonably low. Operating expenses include general maintenance of the building, repairs, utilities, taxes, and tenant services. As with inadequate rental income, poor or overly expensive management can result in negative cash flow.

Joan has two rental properties (duplexes) that are exactly the same size with a one-car garage for each unit. Both are located within walking distance of public transportation. One is a new duplex near downtown Austin, and the other is a duplex built in 1971 in a suburb of Austin. Why can she charge more money for the duplex in Austin?

its location and its appearance. Generally, the amount of rent (income) that a property can command depends on a number of factors, including location, physical appearance, and amenities. Under these facts, the amenities are the same. If the cash flow from rents is not enough to cover all expenses, a negative cash flow will result.

What is the degree of risk associated with real estate investment?

moderately high. A moderately high degree of risk often is involved in real estate investment. An investor's property may decrease in value or may not generate an income sufficient to make it profitable.

A property's equity represents its current value less

mortgage indebtedness. An owner's equity is the current market value of the property less the mortgage indebtedness.

George is a real estate investor; he has 100% ownership of several houses in the DFW area. What type of investments are the houses considered?

real-property assets. Real estate investments generally fall into one of two types: real-property assets (such as single-family homes, apartments, shopping centers, and office buildings) and real estate securities (such as first-lien mortgage notes, Fannie Mae stocks, Freddie Mac bonds, or Ginnie Mae certificates). A REIT is a real estate investment trust, a security that is invested in real estate directly, either through properties or mortgages.

Clara owns Ginnie Mae certificates as part of her real estate investments. What type of investments are the certificates considered?

real-property securities. Real estate investments generally fall into one of two types: real-property assets (such as single-family homes, apartments, shopping centers, and office buildings) and real estate securities (such as first-lien mortgage notes, Fannie Mae stocks, Freddie Mac bonds, or Ginnie Mae certificates). A REIT is a real estate investment trust, a security that is invested in real estate directly, either through properties or mortgages.

Which of the following is a TRUE statement? A) Risks generally are directly proportional to appreciation. B) Risks generally are directly proportional to leverage. C) Risks generally are indirectly proportional to leverage. D) Risks generally are directly proportional to intrinsic value.

risks generally are directly proportional to leverage. A high degree of leverage presents the investor and lender with a high degree of risk; lower leverage results in a lower risk. An investor should be prudent in the use of leverage; when property values drop in an area or vacancy rates rise, the highly leveraged investor may be unable to pay even the financing costs of the property.

An investor sold a six-unit apartment building and purchased a 10-unit building with same market value. The investor gained $40,000 on the sale of the six-unit building, but did not utilize a 1031 exchange. Therefore, this gain

will be taxed. If an investor sold an apartment building but did not participate in a 1031 exchange, the gain on the sale of the apartment building will be taxed at the time of the sale.