Chapter 23 investing in real estate unit exam

A seller is selling an investment property. The original cost of the property was $800,000. The selling price is $1,250,000. The seller paid an 8% commission and $10,000 and closing cost. Two years ago, the seller made $100,000 worth of improvements to the property. Depreciation is $150,000.What is the sellers total capital gain

$390,000 8% x $1,250,000 = $100,000 closing is $10,000 $100,000+ $10,000= $110,000- $1,250,000= $1,140,000 $800,000 OG cost + $100,000 improvements= $900,000 - $150,000 depreciation= $750,000 $1,140,000- $750,000= $390,000

I seller is selling an investment property. Original cost of the property was $800,000. The selling price is $225,000. The seller paid an 8% commission and $2000 and closing cost. Two years ago the seller making thousand worth of improvements to the property depreciation is $15,000 what is the sellers adjusted basis in the property

$75000 80,000 cost +10,000 improvement cost -15,000 depreciation = 75,000 adjusted basis

A real estate investment

Does not guarantee profit and involves high degree of risk

A small Multi family property generates 50,000 in real income 10,000 in expenses 25,000 in debt service. The property appreciate about 25,000 each year. What is the cash flow for this property

15,000 The property brings in $50,000 and has the cost of 35,000 in property expenses and mortgage payments that leaves only 15,000 and positive cash flow. Appreciation on a property that is not yet sold does not create cash flow and is not considered in this calculation

A real estate mortgage investment conduct REMIC has complex rules regarding A. Liquidation B. Transfer C. Qualification D. All of these

All of these

A persons individual decisions and preference to live in a certain geographic area is

Intrinsic value

Disadvantages of investment in real estate include all the following except A. active management or cost of hiring a professional property manager B. relatively low degree of risk C. lack of liquidity D. High cost of to acquire

Relatively low degree of risk

A man made an initial real estate investment of $45,000. He subsequently made $20,000 worth of improvements to the property. If the man subtracts depreciation from the initial cost and adds the cost of improvements, what will be the result? a) Adjusted basis b) Capital gain c) Basis d) Salvage value

a

A small multifamily property generates $50,000 in rental income, $10,000 in expenses, and $35,000 in debt service. The property appreciates about $25,000 each year. What is the cash flow on this property? a) $5,000 b) $15,000 c) $25,000 d) $30,000

a

Based on the information in Question 9, what is the seller's total capital gain? a) $39,000 b) $45,000 c) $80,000 d) $90,000

a

Someone looking for a tax-advantaged investment similar to a mutual fund would probably invest in a a) real estate investment trust. b) general partnership. c) limited partnership. d) corporation.

a

A seller is selling an investment property. The original cost of the property was $80,000. The selling price is $125,000. The seller paid an 8 percent commission and $1,000 in closing costs. Two years ago, the seller made $10,000 worth of improvements to the property. Depreciation is $15,000. What is the seller's adjusted basis in the property? a) $65,000 b) $75,000 c) $80,000 d) $90,000

b

A tax entity created by the Tax Reform Act of 1986 that issues securities backed by a pool of mortgages is a a) REIT. b) REMIC. c) limited partnership. d) pyramid.

b

A woman refinanced her house and used the proceeds to purchase two rental properties. This method of increasing her holdings is called a) exchanging. b) pyramiding. c) syndicating. d) depreciating.

b

Advantages of an investment in real estate include all of the following EXCEPT a) the possibility of a tax-deferred exchange. b) high liquidity. c) the use of leverage d) tax deductions.

b

As part of a Section 1031 exchange, an investor had to give the other party $11,500 and a 1953 Chevrolet. The cash and car are a) equity. b) boot. c) collateral. d) like kind.

b

Cash flow is a) equivalent to operating expense. b) the total amount of spendable income left after expenses. c) the use of borrowed money to finance an investment. d) selling costs plus depreciation.

b

Purchasing a property using leverage, refinancing it after it has appreciated, and using the cash from the refinancing to purchase additional property is one form of a) plottage. b) pyramiding. c) consolidation. d) contribution.

b

The investor who sells property on an installment sale basis a) is taxed on all of the gain in the year the property is sold. b) is taxed on that part of the gain received in each year's installment payments. c) gives the buyer all the federal income tax liability. d) gives the buyer the privilege of deferring all the federal income tax liability.

b

One method a real estate investor may use to defer capital gains tax is to a) sell the property for cash only. b) obtain the maximum amount of leverage. c) exchange one property for a like-kind property. d) build a reserve account for items that are likely to wear out.

c

The type of real estate investment that is required by federal law to distribute 90 %of its income to its shareholders is the a) general partnership. b) limited partnership. c) real estate investment trust. d) time-share estate.

c

When considering an investment in real estate, the prospective investor should consider all of the following EXCEPT the a) anticipated appreciation of the property. b) possible effects of inflation on the property. c) assessed valuation of the property. d) intrinsic value of the property.

c

Which statement is TRUE about a syndicate? a) Members must hold title as joint tenants. b) Most profit on the investment is realized from rents. c) It is a private or public business venture to own property. d) Blue-sky laws do not apply.

c

All of the following are associated with a Section 1031 exchange EXCEPT a) boot. b) qualified intermediary. c) like kind. d) the elimination of capital gains tax.

d

Cash flow is a term that refers to the a) amount of money flowing into and out of a property. b) bookkeeping function that accounts for the cash each day. c) taxes, operating expenses, and loan payments on the property. d) total amount of income left after all expenses have been paid.

d

The primary source of tax shelters in real estate investments comes from which accounting concept? a) Recapture b) Boot c) Net operating income d) Depreciation

d

Which situation would result in the highest degree of leverage? a) Using your own funds entirely b) Using more of your own funds than those you borrow c) Using more of the funds you borrow than your own funds d) Using borrowed funds entirely

d