UNIT 5: other investment vehicles

Regarding limited partnerships, which of the following are true? (2 answers) 1. A general partner can be held personally liable for business losses and debts. 2. A limited partner can be held personally liable for business losses and debts. 3. A general partner business decisions are legally binding on the partnership. 4. A limited partner business decisions are legally binding on the partnership.

1. A general partner can be held personally liable for business losses and debts. 3. A general partner business decisions are legally binding on the partnership. General partners have unlimited liability, meaning that they can be held personally liable for the partnership's losses and debts. In their role to manage the partnership, they make decisions that are legally binding on the partnership.

An investor considering the differences between purchasing open-end investment company shares or ETFs with a similar objective should understand which of these? (2 answers) 1. Each time an investor purchases and sells ETFs there is a commission. 2. The operating expense ratio for an ETF is generally very high because they usually track indexes such as the S&P 500. 3. It is possible that an investor liquidating ETF holdings will receive less than the NAV per share. 4. The margin requirements to purchase an ETF are higher than that for an open-end investment company.

1. Each time an investor purchases and sells ETFs there is a commission. & 3. It is possible that an investor liquidating ETF holdings will receive less than the NAV per share. Because ETFs usually track an index, the operating expense ratios are generally lower than that of open-end companies. That advantage can be canceled out by the commission charges when purchasing and selling an ETF. An open-end investment company must redeem shares at the NAV per share; ETFs pricing is based upon supply and demand making it possible to receive less than NAV. One cannot purchase open-end shares on margin.

529 College Savings Plan (municipal fund security)

A government-sponsored investment vehicle that allows earnings to grow free from federal taxes, so long as they are used to meet college education expenses. $10k spending limit per year but there are exceptions State sponsored

A REIT can avoid being taxed as a corporation would by A) receiving 75% or more of its income from real estate and distributing 90% or more of its net investment income to its shareholders. B) receiving 100% of its income from real estate and distributing 90% or more of its net investment income to its shareholders. C) receiving less than 50% of its income from real estate and distributing 50% or more of its net investment income to its shareholders. D) receiving less than 75% of its income from real estate and distributing 100% of its net investment income to its shareholders.

A) receiving 75% or more of its income from real estate and distributing 90% or more of its net investment income to its shareholders. Under the guidelines set by the Internal Revenue Code, a REIT can avoid being taxed as a corporation by receiving 75% or more of its income from real estate and distributing 90% or more of its net investment income to its shareholders. LO 5.h

For ETFs, the phrase "tax efficiency" can best be described by which of the following concepts? A) These exchange-traded products can be purchased on margin, allowing for a smaller initial investment. B) ETFs generally have reportable tax gains passed on annually. C) Usually, for ETFs, there are no tax consequences for investors until the shares are sold. D) All transactions in ETFs are commissionable, and sales charges do not apply. Explanation

C) Usually, for ETFs, there are no tax consequences for investors until the shares are sold. The single greatest advantage associated with ETFs is the fact that while they can pass on capital gains from time to time, creating tax consequences in that year, they rarely do. Therefore, there would be no expected tax consequences until the shares are sold. This is the tax efficiency generally associated with ETFs.

Last year Brownstone Properties, LP distributed $200 per unit to investors and reported a $500 business loss per unit on the K-1. For tax purposes the investors received A) $200 per unit of passive income. B) a $500 reduction in ordinary income. C) a net $300 loss. D) a $500 per unit passive loss.

D) a $500 per unit passive loss.

A REIT that owns and operates an office building in the Dallas Metroplex is an example of A) a leasing REIT. B) a hybrid REIT. C) a mortgage REIT. **

D) an equity REIT. A real estate investment trust that owns properties but does not hold mortgages is an equity REIT. One that holds mortgages but not the property is a mortgage REIT. One that does both is a hybrid REIT. There is no such thing as a leasing REIT. LO 5.h

Which of following securities is least likely to have an active trading market? A) Municipal bonds B) Preferred shares C) Real estate investment trusts (REITs) D) Limited partnership interests

D) Limited partnership interests A disadvantage to limited partnership interests is the lack of liquidity. Of the choices above, direct participation programs such as limited partnership interests are generally deemed illiquid. Whereas municipal debt securities, preferred stock, and REITs are often freely traded in their respective marketplaces.

In an LP, which of the following is true? A) The partners are not responsible for paying taxes on gains. B) Only losses but not gains flow through to the individual partners. C) Any gains realized from a limited partnership are tax exempt. D) The partnership entity is not responsible for paying taxes on gains.

D) The partnership entity is not responsible for paying taxes on gains. Both gains and losses from an LP flow through to the individual partners. Gains are taxable, and any taxes due are the responsibility of the individual partners, not the partnership entity.

General partnerships must approve sale of interest in the DPP. T or F

True

If current beneficiary receives a scholarship, the donor may withdraw the equivalent value from the plan without penalty. But income taxes on the gains would still apply. T or f

True

If person meets age/onset criteria and is receiving benefits through SSI or social security disability insurance, he is AUTOMATICALLY eligible to establish an ABLE ACCT. true or false

True

Most states permit tax free withdrawals as long as the donor has opened an IN STATE PLAN. True or false

True

REITS are NOT DPP. True or false

True

The $10,000 spending limit of a 529 Savings Plan does NOT apply to college education (posy-secondary) T OR F

True

The investor are individually responsible for paying any tax consequences with a DPP (direct participation program. True or false

True

With no SEC registration required for LGIPs, there is no prospectus. True or false

True

Withdrawals from 529 plan for non qualified (nothing related to education) expenses will be subject to a taxes on any gains and a 10% penalty on the gains. True or false.

True

DPP businesses prepares form K-1 for each partner that details income and losses for the partner. True or false.

True Remember, all tax consequences of the business are passed through to the partners. DPPs are tax reporting but not tax paying entities

Some states allow contributions to in-state plans to be tax deductible. True or false

True. But for out of state, not the same tax advantage.

What is a partnership ?

Unincorporated association of two or more individuals. Partnerships frequently open accts necessary for business purposes

Tax credits for partners in a real estate program can come primarily from A) income-producing properties, both residential and retail. B) government-assisted housing and historic rehabilitation properties. C) historic rehabilitation and any rent-producing properties. D) any property with the potential to appreciate in value.

B) government-assisted housing and historic rehabilitation properties. For partners in a real estate programs, tax credits would come primarily from programs concentrating on properties designated for government-assisted housing or historic rehabilitation. These are credits offered by the federal government. LO 5.f

DPPs are considered highly illiquid and therefore are not suitable for many investors. True or false

True

Are withdrawals of 529 plan tax free at the federal level if they are used for qualified education expenses?

Yes.

Intangible drilling costs (IDCs) associated with oil and gas DPPs can generally A) be deducted completely in the first year of the program. B) not be deducted until the end of the programs life. C)not be deducted at all. D) be deducted up to a certain percentage in the earlier years of the program.

A) be deducted completely in the first year of the program. The deduction allowable for IDCs associated with oil and gas DPPs is one of the unique tax advantages of these programs. These costs can be deducted completely in the first year of the program instead of over the life of the program.

Your customer is a limited partner in a real estate partnership. This partner has the right to do all of the following except A) choose which properties the partnership should buy or sell. B) vote with the limited partners to remove the general partner. C) inspect and obtain copies of all partnership records. D) sue the general partner for damages resulting from any business decisions made.

A) choose which properties the partnership should buy or sell. All of these are rights of the LP, except choosing the assets to be purchased for the partnership. This is a function of the general partner (GP). LO 5.e

**Section 529 plans are considered municipal fund securities. They must therefore be sold by; A) offering circular. B)security memo. C)prospectus. D)investment letter.

A) offering circular. Municipal bonds are sold by offering circular, a document similar to a prospectus used in the sale of municipal securities. Because Section 529 plans are state sponsored, they must be sold by offering circular.

What is a general partnership

All partners in the business have responsibility to manage the business. Ownership may be unequal and specific responsibilities are assigned. ALL OWNERS may be held liable for actions of the partnership. There is no liability protection. I

Benefits of prepaid tuition plan?

Allow resident donors to lock in current tuition rates by paying now for future education costs. Any adult can open a 529 plan for a future college student and the donor does not have to be related to the student.

All of these are potential risks of private, nontraded, REITS except A) liquidity. B) tax treatment. C) transparency. D) reliability of valuations.

B) tax treatment. Nontraded REITs are taxed the same way as public (traded) REITs. There are concerns about the private REITs lack of liquidity, transparency in operations, and the difficulty of valuing the programs.

For hedge funds organized as private investment partnerships, which of the following is true? A) They will allow unlimited numbers of investors and allow small initial investments. B) They can limit the number of investors and require large or minimum initial investments. C) They will allow unlimited numbers of investors and require large or minimum initial investments. D) They can limit the number of investors and typically have no minimum initial investment requirement.

B) They can limit the number of investors and require large or minimum initial investments. Hedge funds organized as private investment partnerships typically limit the number of investors and require large minimum initial investments. This would be the opposite of a regulated investment company, such as an open- or closed-end fund company.

Limited partnerships sold publicly via a prospectus offering would be expected to have A) a small group of investors, each contributing a small sum. B) a large group of investors, each contributing a small sum. C) a large group of investors, each contributing a large sum. D) a small group of investors, each contributing a large sum. Explanation

B) a large group of investors, each contributing a small sum. Unlike partnerships sold as private placements, those limited partnerships sold through a public offering via a prospectus would consist of a large group of investors (partners), each contributing a small investment sum to the partnership. LO 5.e

What are Direct participation programs (DPPs) and how are they taxed

Business that raise $$ to invest in real estate, oil, gas, equipment leasing, etc. - not taxed directly as a corporation but instead the income or losses are passed directly through to the investors.

What is an equipment leasing DPP

Buying airplanes, railroad cars, computer services

Which of the following are potential benefits associated with a real estate direct participation program? A) Dividends and interest B) Depletion allowances C) Tax deductions and credits D) Intangible costs

C) Tax deductions and credits

An allowable deduction to compensate for decreasing natural resources in an oil and gas DPP are known as: A) depreciation deductions. B) deductions for IDCs. C)depletion allowances. D) tax credits.

C)depletion allowances. Tax deductions that compensate an oil and gas program for the decreasing supply of the resource after it is taken out of the ground and sold are known as depletion allowances.

Which of these is not considered an advantage of owning an exchange-traded fund? A) Liquidity B) Tax efficiency C) Intraday pricing D) Pass through of losses

D) Pass through of losses ETFs are taxed using pipeline theory and do not pass losses through to investors. The others all considered advantages of ETFs.

What are the 3 types of REITS

Equity trusts, mortgage trusts, hybrid

What are the two broad categories of partnership?

General and limited partnerships.

An limited partnership involves two types of partners:

General partner and the limited partner. Must have TWO of each.

In oil and gas programs (DPP) what are the benefits?

Intangible drilling costs Depletion allowances

What is a limited partnership (the most common type of DPP)

Investment opportunities that allow the economic consequences of a business to pass through to the investors. The business themselves are not tax paying entities. The investors (partners) would them have the responsibility to report individually to the IRS.

REITs (Real Estate Investment Trusts)

Joint ventures, usually in the form of a limited partnership, through which real estate is purchased. A person must have a securities license to sell REITS. REITs avoid double taxation as they are taxed to the beneficiary. - capital appreciation -cash flow -tax deductions -tax credits

What are the risks to limited partnerships?

Liquidity risk Audit recapture of previously used tax benefit

What are the two types of 529 plans?

Prepaid tuition plans for state residents And Savings plans for residents and non residents.

What are the types of DPP

Real estate programs (REITS) Oil and gas programs Equipment leasing

Why are the risk of equipment leasing DPP?

Risk of obsolescence (old ass equipment)

Local government investment pools (LGIPs) are?

States establish LGIPs to provide other government Entities (cities, counties, school districts, other state agencies) with short term investment vehicle to invest funds. The LGIPs are formed as a trust in which municipalities can purchase shares or units in the LGIPs investment portfolio.

Achieving a Better Life Experience (ABLE - 529A) is?

Tax/advantage savings accounts for people with disabilities and their families. The income earned by the accounts is not taxed. The beneficiary of the account IS the acct owner.

Property in limited partnerships are held in the form of what?

Tenants in common (TIC) which provides limited liability and no management responsibilities.

What is the greatest disadvantage to limited partners?

The lack of liquidity in the partnership interestZ

Benefits of savings plan?

This is more popular option. Allows donors to save $$ to be used later for education expenses.

(General partnership) the business results of the partnership flow through to the partners for tax purposes proportional to their ownership interest. True or false

True

(In general partnerships) The partnership is a tax-reporting entity but not a tax paying entity (the owners would pay the taxes) true or false

True

Assets in the account remain under the donor's (parent) control even after the student becomes of legal age with a 529 plan. True or false

True

Contributions to 529 plans are considered gifts under fed tax law and are made with after tax dollars, and earnings accumulated on a tax-deferred basis. T or f

True

Contributions to ABLE acct must be made using after tax dollars and is NOT tax deductible for purposes of fed income taxes. Some states do allow income tax deductions for contributions made to an ABLE acct. true or false

True

REITS are not investment companies. True or false

True because they don't buy securities. Just property

LGIPs are NOT required to register with the SEC and are not subject to SEC rules. T or F

True.

LGIP May be permitted to maintain a fixed $1 NAV. True or false

True. Maintaining a stable NAV, facilitates liquidity and minimum price volatility

The ABLE act limits eligibility to people with significant disabilities where the age of onset of the disability occurred before turning age 26. T or F

True. A people can be over age 26 to have this acct but as long as the disability occurred before age 26 to be eligible