Real Estate Guide Unit 22

Which situation would result in the highest degree of leverage? A) Using more of your own funds than those you borrow. B) Using borrowed funds entirely. C) Using your own funds entirely. D) Using more of the funds you borrow than your own funds.

Using borrowed funds entirely

The effect of leveraging is the result of: A) Investor manipulation as measured only against the actual cash invested. B) Market forces on the original purchase price as measured against the actual cash invested. C) Market forces on an anticipated future sales price measured against the full original price paid. D) Investor manipulation and an anticipated future sales price measure against the actual cash invested.

Market forces on the original purchase price as measured against the actual cash invested.

Income Property

Property held for current income as well as a potential profit upon its sale.

Any pooling of individuals' funds raises questions of securities registration under federal and state securities laws, called: A) Anti-pyramiding laws B) Pie-in-the-sky laws C) Clear-sky laws D) Blue-sky laws

Blue-sky laws

Any additional capital or personal property included with a real property transaction to even out the value of a property exchange is called: A) Equity build-up. B) Boot. C) A REIT. D) Cost recover.

Boot

As part of a Section 1031 exchange, an investor had to give the other party $111,500 and a 1957 Chevrolet. The cash and car are: A) Boot B) Collateral C) Equity D) Like kind

Boot

Under the Internal Revenue Code, the name for any additional capital or personal property included with a transaction to balance the value of property exchange is called __.

Boot

One method a real estate investor may use to defer capital gains tax is to: A) Exchange property for like-kind property. B) Build a reserve account for items that are likely to wear out. C) Sell property for cash only. D) Obtain the maximum amount of leverage.

Exchange property for like-kind property.

Advantages of an investment in real estate include all of the following EXCEPT: A) High liquidity. B) The possibility of tax-deferred exchange. C) Tax deductions. D) The use of leverage to increase rates of return.

High liquidity

Adjusted Basis

If a property was acquired by purchase, the owner's basis is the cost of the property plus the value of any capital expenditures for improvements to the property, minus any depreciation allowable or actually taken.

The investor who sells property on an installment sale basis: A) Gives the buyer the privilege of deferring all the federal income tax liability. B) Is taxed on that part of the gain received in each year's installment payments. C) Is taxed on all of the gain in the year the property is sold. D) Give the buyer all the federal income tax liability.

Is taxed on that part of the gain received in each year's installment payments.

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

It is a private or public business venture to own property.

The use of borrowed money to finance an investment is called: A) Compounding B) Capitalization C) Pyramiding D) Leverage

Leverage

How quickly an asset may be converted into cash is called: A) Liquidity B) Transferability C) Rate of return D) Covertibility

Liquidity

Accelerated Cost Recovery System (ACRS)

Method for claiming tax deductions for certain property purchased before 1987 in which it was possible to claim greater deductions in the early years of ownership, gradually reducing the amount deducted in each year of useful life.

Boot

Money or property given to make up any difference in value or equity between two properties in an exchange.

Equity Buildup

That portion of the loan payment directed toward the principal rather than the interest, plus any gain in property value due to appreciation.

Cash Flow

The net spendable income from an investment, determined by deducting all operating and fixed expenses from the gross income. When expenses exceed income, a negative cash flow results.

Real Estate Investment Trust (REIT)

Trust ownership of real estate by a group of individuals who purchase certificates of ownership in the trust, which in turn invests the money in real property and distributes the profits back to the investors free of corporate income tax.

Which of the following is TRUE regarding a real estate investment? A) Real estate can usually be sold without having to reduce the price significantly to accommodate a fast sale. B) Unlike stocks and bonds, real estate is not highly liquid over the short term. C) Real estate doesn't require considerable experience or expert advice. D) Like stocks and bonds, real estate is highly liquid over the short term.

Unlike stock and bonds, real estate is not highly liquid over the short term

Which situation would result in the highest degree of leverage? A) Using your own funds entirely. B) Using more of the funds that you borrow than your own funds. C) Using borrowed funds entirely. D) Using more of your own funds than those that you borrow.

Using borrowed funds entirely

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

All of these

For a REMIC, the asset test means: A) Almost all assets in the REMIC must be qualified mortgages and permitted investments. B) Funds to buy into the REMIC must come from a previous real estate investment. C) Investors are not allowed to hold residual interests in a REMIC. D) Investors' interests in the REMIC may consist of only one class of regular interests.

Almost all assets in the REMIC must be qualified mortgages and permitted investments.

Cost Recovery

An Internal Revenue Service term for depreciation.

Intrinsic Value

An appraisal term referring to the value of a property unaffected by a person's personal preferences.

Appreciation

An increase in the worth or value of a property due to economic or related causes, which may prove to be either temporary or permanent; opposite of depreciation.

Real estate is an avenue of investment open to those interested in holding property primarily for increasing value, which is called: A) Appreciation B) Valuation C) Growth D) Appreciative

Appreciation

When considering an investment in real estate, the prospective investor should consider all of the following EXCEPT: 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.

Assessed valuation of the property

Real estate is more likely to have better-than-average investment potential when it is held for: A) At least 10 to 20 years or longer. B) At least five years. C) A short period of time. D) No longer than it takes to reach the top of the next market cycle.

At least 10 to 20 years or longer

T/F: A disadvantage of investing in real estate is that it involves a high degree of risk.

TRUE

The result of a mortgage loan payment applied to the principal rather than the interest, plus any increase in property value due to appreciation, is called __ buildup.

Equity

A man owns an apartment building that generated $60,000 in rental income, $15,000 in expenses, and $35,000 in debt service last year. Also, the property appreciated about $10,000 last year. What was the amount of cash flow on the man's apartment building last year? A) $20,000 B) $10,000 C) $25,000 D) $15,000

$10,000

A small multifamily property generates $50,000 in rental income, $10,000 in expenses, and $25,000 in debt service. The property appreciates about $25,000 each year. What is the cash flow on this property? A) $40,000 B) $15,000 C) $25,000 D) $35,000

$15,000

A seller is selling an investment property. The original cost of the property was $80,000. The selling price is $225,000. The seller paid an 8% commission and $2,000 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 total capital gain? A) $800,000 B) $900,000 C) $450,000 D) $390,000

$390,000

A seller is selling an investment property. The original cost of the property was $80,000. The selling price is $225,000. The seller paid an 8% commission and $2,000 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) $80,000 B) $90,000 C) $65,000 D) $75,000

$75,000

A seller is selling an investment property. The original cost of the property was $80,000. The selling price is $225,000. The seller paid an 8% commission and $2,000 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) $800,000 B) $750,000 C) $900,000 D) $650,000

$750,000

Depreciation

(1) In appraisal, a loss of value in property due to any cause, including physical deterioration, functional obsolescence, and external obsolescence. (2) In real estate investment, a deduction for tax purposes taken over the period of ownership of income property, based on the property's acquisition cost.

If an investor spends $100,000 for rental property, makes a $20,000 down payment, and then sells the property five years later for $125,000, the return over five years is: A) 80% of the original investment. B) 16% of the original investment. C) 125% of the original investment. D) 25% of the original investment.

125% of the original investment

Syndicate

A combination of people or firms formed to accomplish a business venture of mutual interest by pooling resources. In a real estate investment syndicate, the parties own and/or develop property, with the main profit generally arising from the sale of the property.

A business venture in which people pool their resources to own or develop a particular piece of property is called: A) A syndicate B) Leverage C) A Real Estate Investment Trust (REIT) D) Convertibility

A syndicate

Real Estate Mortgage Investment Conduit (REMIC)

A tax entity that issues multiple classes of investor interests (securities) backed by a pool of mortgages.

Exchanges

A transaction in which all or part of the consideration is the transfer of like-kind property (e.g., real estate for real estate).

Which of these is an advantage of investing in a Real Estate Investment Trust (REIT)? A) Income taxed at corporate rates. B) Access to the same tax benefits as mutual fund investors. C) At least 90% of the income must come from real estate. D) Direct ownership of real estate.

Access to the same tax benefits as mutual fund investors.

A man made an initial real estate investment of $245,000. He subsequently made $80,000 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) Capital gain. B) Basis. C) Adjusted basis. D) Salvage value.

Adjusted basis

An investor adds the cost of any physical improvements to the initial cost of the property and then subtracts the amount of any depreciation claimed as a tax deduction. This is the method for calculating the: A) Leverage. B) Basis. C) Cash flow. D) Adjusted basis.

Adjusted basis

An investor made an initial real estate investment of $45,000 and subsequently made $20,000 worth of improvements to the property. If the investor subtracts depreciation from the initial cost and adds the cost of improvements, what will be the result? A) Basis B) Adjusted basis C) Capital gain D) Salvage value

Adjusted basis

A person's individual decisions and references to live in a certain geographic area is: A) Preferential value. B) Intrinsic value. C) Personal value. D) Market value.

Intrinsic value

One objective of investing in income property is to generate spendable income, also called: A) Pyramiding. B) Basis. C) Cash flow. D) Appreciation.

Cash flow

In terms of real estate investment, another name for depreciation is: A) Intrinsic value. B) Cost recover. C) Leverage. D) Liquidity.

Cost recovery

Cost recovery, or __, allows investors to recover the cost of an income-producing asset through tax deductions over the asset's useful life.

Depreciation

Expenses that affect cash flow include all of the following EXCEPT: A) Maintenance and repairs. B) Mortgage payments. C) Depreciation. D) Real estate taxes

Depreciation

The primary source of tax shelters in real estate investments comes from which accounting concept? A) Net operating income. B) Recapture. C) Boot. D) Depreciation.

Depreciation

Which of the following types of expenses does NOT affect cash flow? A) Maintenance and repairs. B) Mortgage payments. C) Real estate taxes. D) Depreciation.

Depreciation

Which of the following describes straight-line depreciation? A) The amount of depreciation increases each year until the asset is sold or devalued. B) Depreciation is taken periodically in equal amounts over an asset's useful life. C) Depreciation is taken periodically in equal amounts over a maximum of 10 years. D) The amount of depreciation decreases each year until the asset is sold or devalued.

Depreciation is taken periodically in equal amounts over an asset's useful life

Straight-Line Depreciation

Depreciation taken periodically in equal amounts over an asset's useful life.

A real estate investment: A) Does not guarantee a profit and involves a high degree of risk. B) Usually guarantees a profit, with little risk involved. C) Does not guarantee a profit but involves little risk. D) Usually guarantees a profit but involves a high degree of risk.

Does not guarantee a profit and involves a high degree of risk.

T/F: Under the rules of Section 1031 of the Internal Revenue Code, real estate investors can exchange property and defer taxation of capital gains.

TRUE

T/F: A benefit of investing in real estate is that it does NOT require active management.

FALSE

T/F: A high degree of leverage in real estate investing means lower risk for the investor and the lender.

FALSE

T/F: A real estate investment trust does NOT have to pay corporate income tax as long as 75% of its income is distributed to its shareholders.

FALSE

T/F: Capital gain is the difference between the initial cost of the property and its net selling price.

FALSE

T/F: Cost recovery deductions (depreciation) may be taken on personal property, improvements to land, and unimproved land.

FALSE

T/F: Equity buildup is a result of a loan payment directed toward the principal rather than the interest and without consideration of any gain in property value due to appreciation.

FALSE

T/F: If a taxpayer sells real estate on an installment plan, the seller pays tax only on the principal portion of each payment received.

FALSE

T/F: Inflation occurs when the amount of money in circulation decreases.

FALSE

T/F: Investing in rental property has more risks than investing in unimproved land.

FALSE

T/F: Private syndication generally involves a large group of investors who may or may not be knowledgeable about real estate as an investment.

FALSE

T/F: Real estate investors can eliminate taxation of capital gains by making property exchanges.

FALSE

T/F: To receive high cash flow on investment property, investors try to keep operating expenses high.

FALSE

In terms of income property, another name for spendable income generated by the property is cash __.

Flow

An increase in the amount of money in circulation is called: A) Intrinsic value. B) Stagflation. C) Adjusted cash flow. D) Inflation.

Inflation

Which factor affects a property's potential price increase the MOST? A) Location. B) Purchase price. C) Inflation. D) Deflation.

Inflation

The two main factors affecting appreciation are: A) Inflation and intrinsic value. B) Inflation and market value. C) Local demographics and market value. D) Local demographics and intrinsic value.

Inflation and intrinsic value

What are the two main factors that affect appreciation? A) How fast an area will develop and how certain development will take place. B) Inflation and intrinsic value. C) Property basis and property tax rates. D) Ability to leverage and cost of borrowing.

Inflation and intrinsic value

Tax considerations of installment sales include which of the following? A) Interest received is taxes at capital gains rates. B) Tax is deferred on profit received. C) Interest received is taxes as ordinary income. D) Both profit and interest received are taxed at capital gains rates.

Interest received is taxes as ordinary income

A property that is located in an attractive neighborhood with access to good shopping and business areas has a greater __ value to most buyers than similar property in a more isolated and less pleasant location.

Intrinsic

A small group of closely associated or experienced investors is typically a: A) Public syndication B) Private enterprise C) Public enterprise D) Private syndication

Public syndication

A woman refinanced her house and used the proceeds to purchase two rental properties. This method of increasing her holdings is called: A) Syndicating. B) Depreciating. C) Pyramiding. D) Exchanging.

Pyramiding

A woman refinanced her house to pay off her old loan and generate $100,000 cash, which she used to purchase two rental properties. This method of increasing her holdings is called: A) Pyramiding. B) Depreciating. C) Syndicating. D) Exchanging.

Pyramiding

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) Contribution. B) Plottage. C) Pyramiding. D) Consolidation.

Pyramiding

Some investments have failed to produce returns greater than the: A) Federal funds rate. B) Federal discount rate. C) Rate of inflation. D) Average certificate of deposit.

Rate of inflation

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.

Real estate investment trust

The type of real estate investment that is required by federal law to distribute 90% of its income to its shareholders is the: A) Limited partnership. B) Time-share estate. C) Real estate investment trust. D) General partnership.

Real estate investment trust

Disadvantages of investment in real estate included all the following EXCEPT: A) Relatively low degree of risk. B) Lack of liquidity. C) High cost to acquire. D) Active management or cost of hiring a professional property manager.

Relatively low degree of risk

What is an advantage of investing in real estate? A) Need for active management. B) Tax credits for certain types of projects. C) Not highly liquid in the short term. D) Investment of large amount of capital.

Tax credits for certain types of projects

T/F: Equity build-up in a property is realized as cash when the property is sold.

TRUE

T/F: In a real estate mortgage investment conduit (REMIC), the holders of regular interests receive interest or similar payments.

TRUE

T/F: In pyramiding, the investor delays capital gains taxes by refinancing (rather than selling) the original property and then using the cash generated to purchase additional properties.

TRUE

T/F: Intrinsic value of a property is the result of a person's individual choice and preferences for a particular geographic area.

TRUE

T/F: Pyramiding is the process of using one property to drive the acquisition of additional properties.

TRUE

T/F: Two main factors affect appreciation: Inflation and intrinsic value.

TRUE

Liquidity

The ability to sell an asset and convert it into cash, at a price close to its true value, in a short period of time.

Capital Gain

The difference between a higher selling price and a lower purchase price, resulting in a financial gain for the seller

All of the following are associated with a Section 1031 exchange EXCEPT: A) Qualified intermediary. B) Like kind. C) The elimination of capital gains tax. D) Boot.

The elimination of capital gains tax.

Basis

The financial interest that the Internal Revenue Service attributes to an owner of an investment property for the purpose of determining annual depreciation and gain or loss on the sale of the asset.

Inflation

The gradual reduction of the purchasing power of the dollar, usually related directly to increases in the money supply by the federal government.

Pyramiding

The process of acquiring additional property by refinancing property already owned and investing the loan proceeds in additional properties.

Cash flow is: A) The use of borrowed money to finance an investment. B) Equivalent to operating expense. C) The total amount of spendable income left after expenses. D) Selling costs plus depreciation.

The total amount of spendable income left after expenses.

Leverage

The use of borrowed money to finance an investment.

Cash flows is a term that refers to the: A) Taxes, operating expenses, and loan payments on the property. B) Amount of money flowing into and out of a property. C) Total amount of income left after all expenses have been paid. D) Bookkeeping function that accounts for the cash each day.

Total amount of income left after all expenses have been paid.