NYC Real 31

Bill and Brenda bought their home for $150,000. They made $50,000 of improvements. They sold the home for $450,000 and paid $30,000 in selling expenses, including the broker's commission. On what amount will they pay capital gains tax?

$0 The amount realized is $420,000 ($450,000 - $30,000). The adjusted basis is $200,000 ($150,000 + $50,000). The capital gain for this property is $220,000 ($420,000 - $200,000). Since they are eligible for an exclusion, their capital gains tax will be $0.

Sam purchased an apartment building in April of 2007. His initial basis on the building is $395,250 What is his monthly depreciation allowance?

$1,197.73

Lori purchased a home for $250,000 with an additional $5,000 in related purchase costs and then added a garage at a cost of $25,000. She sold the home 10 years later for $575,000 and paid $35,000 in selling costs. She will pay capital gains tax on how much?

$10,000 $250,000 + $5,000 = $255,000 beginning basis + $25,000 capital improvements = $280,000 adjusted basis; $575,000 selling price - $35,000 selling costs = $540,000 amount realized - $280,000 adjusted basis = $260,000 gain on sale. The capital gains tax exclusion for a single person is $250,000, so Lori will pay capital gains tax on $10,000 ($260,000 gain - $250,000 exclusion = $10,000).

Greta owns a home she purchased in 2001. It has an FMV of $110,000 and her current balance on the original mortgage (home acquisition debt) is $95,000. Heritage Bank offers Greta a home mortgage loan of 125 percent of the FMV of the home less any outstanding mortgages or other liens. That equates to $42,500.

$110,000 x 125% = $137,500 - $95,000 = $42,500

Carol sold her investment property for $450,000 and had $21,000 in closing costs. The property had a beginning basis of $312,000, capital improvements of $34,000, and depreciation of $80,000. What was Carol's capital gain?

$163,000

Sam purchased a factory with an initial tax basis of $13,000,000. What is his monthly depreciation allowance?

$27,778

Derek bought his home for $250,000. He made $25,000 of improvements. Derek sold the home for $895,000 and paid $90,000 in selling expenses, including the broker's commission. On what amount will Derek pay capital gains tax?

$280,000 The amount realized is $805,000 ($895,000 - $90,000). The adjusted basis is $275,000 ($250,000 + $25,000). The capital gain for this property is $530,000 ($805,000 - $275,000). Derek qualifies for the $250,000 exclusion, so he will pay capital gains tax on $280,000 ($530,000 - $250,000).

If Rob and Lori purchased a home for $250,000 with an additional $4,000 in related purchase costs and then added a swimming pool at a cost of $30,000 and a new air conditioning system at a cost of $5,000, what would their adjusted basis be when they sell the home?

$289,000.

Rob and Lori purchased a home for $350,000 with an additional $5,000 in related purchase costs and then added a garage at a cost of $25,000. They sold the home for $450,000 and paid $28,000 in selling costs. How much was adjusted basis?

$380,000

Rob and Lori purchased a home for $350,000 with an additional $5,000 in related purchase costs and then added a garage at a cost of $25,000. They sold the home for $450,000 and paid $28,000 in selling costs. How much was the gain on the sale of their home?

$42,000

Matt sold his house for $2,200,000 and had $195,000 in closing costs. His beginning basis was $1,955,000 and he spent $5,000 on capital improvements. What is Matt's capital gain for tax purposes? (assume he doesn't qualify for an exclusion)

$45,000

Rob and Lori purchased a home for $250,000 with an additional $4,000 in related purchase costs and then added a swimming pool at a cost of $30,000 and a new air conditioning system at a cost of $5,000. Five years later, they sold the home for $375,000 and paid $23,000 in selling costs. How much was their gain on the sale of the home?

$63,000

When money is withdrawn from an IRA for purchasing a first home, the money must be used within __________ of withdrawal.

120 days

In order to qualify for a tax-deferred exchange, how many days does an exchanger have to contract for the replacement property?

45

Which of the following is NOT a current tax bracket?

7%

What is the IRS rule about deducting prepayment penalties?

A homeowner may deduct the penalty as home mortgage interest provided the penalty is not for a specific service performed or a cost incurred in connection with the mortgage loan.

What is the definition of a low-income household?

A low-income household is defined as one having an income of 60 percent or less of the area median adjusted for household size.

What kinds of mortgage loans are eligible for interest tax deductions?

A mortgage to buy a home A second mortgage A line of credit A home equity loan

Which of the following is not an example of a like-kind exchange?

A principal residence for a motel

What is the difference between a realized and an unrealized capital gain?

A realized capital gain is an investment that has been sold at a profit. An unrealized capital gain is an investment that hasn't been sold yet but would result in a profit if sold.

What are the capital gains exclusions associated with the sale of a personal residence and how often can the exclusion be used?

A single seller can exclude up to $250,000 of gain and a couple can exclude up to $500,000. The exclusion can be used once every two years.

What is the difference between active income and passive activity income?

Active income is income for which the taxpayer performs services. Passive activity income is income from rental activity, limited business interests or other activities in which the investor does not materially participate.

Define the terms amount realized, basis and adjusted basis.

Amount realized - The sale price of the property minus the costs of the sale. Basis - A measurement of how much is invested in the property for tax purposes. Adjusted basis - The initial or beginning basis, plus capital improvement, minus exclusions, credits or other amounts received.

What is the formula for determining the gain on the sale of a home?

Amount realized - adjusted basis = gain on sale.

Property that is eligible for like-kind exchange includes:

Apartments and residential rentals Commercial property Industrial property Farms Leaseholds greater than 30 years Unimproved land (non-dealer held property) Hotels or motels

What is the IRS rule about deducting the full amount of points in the year they are paid?

As a general rule, a homeowner cannot deduct the full amount of points in the year they are paid. Because they are prepaid interest, the borrower will usually deduct them equally over the life of the mortgage. However, if the homeowner meets a set of nine tests the IRS has set out, the full amount of the points may be deducted in the year paid.

What is a measurement of how much is invested in the property for tax purposes?

Basis

List three kinds of property eligible for like-kind exchange. (See screen 22 for other correct answers.)

Commercial property Industrial property Leaseholds greater than 30 years

What is grandfathered debt?

Debt on mortgages taken out on or before October 13, 1987.

What type of exchange occurs when there is a time gap between the transfer of the relinquished property and the acquisition of the replacement property?

Delayed exchange

What tax deduction can an owner of an income-producing property take that the owner of a personal residence cannot take?

Depreciation

What is the formula to calculate straight-line depreciation on an income property?

Divide the building's cost by the number of years of the building's class life

Basis is decreased by

Easements Basis is increased by such expenditures as transfer taxes, capital improvements, and assessments but is decreased by such things as easements.

What income taxes do residents of New York City have to pay?

Federal, state, and city income taxes

The Taxpayer Relief Act allows penalty-free IRA withdrawals for

First time home buyers.

What do we call debt on mortgages taken out prior to October 13, 1987?

Grandfathered debt

What is home acquisition debt?

Home acquisition debt or financing is a mortgage that was taken out after October 13, 1987 to buy, build or substantially improve a qualified home - defined as a main or second home.

What is boot and is it taxable?

In a like-kind exchange, any cash or relief one party receives in addition to the actual property is called boot. The person who receives the boot has a net gain and must pay taxes on it.

The tax rate that applies to income is called the marginal tax bracket. There are currently seven tax brackets: 0, 10, 15, 25, 28, 33 and 35 percent.

In the state of New York, taxpayers pay both federal and state income tax. In New York City, there is an additional city income tax for residents of the city and for non-residents who earn income from NY investments.

Net income

Income - Expenses =

Dan and Gail purchased a home 15 years ago for $200,000. They have done some recent remodeling that cost another $50,000. They sold their home for $350,000 and paid $25,000 in selling expenses. What is their gain and on what part of that will they owe taxes?

Initial Basis Improvements Adjusted Basis $200,000+ 50,000$250,000 Sale Price Sales Expenses Amount Realized $350,000- 25,000$325,000 Amount Realized Adjusted Basis Gain (before exclusion) $325,000- $250,000$75,000 Since Dan and Gail are allowed an exclusion of $500,000, they will not owe any taxes on their gain.

What is the definition of a like-kind exchange?

One property can be exchanged for another property regardless of the property type, as long as it is held as an investment or for use in a trade or business.

Capital losses can NOT be claimed on

Personal residences

Which of the following statements about points is true?

Points paid on a second home can only be deducted over the life of the loan. Points paid on a second home can only be deducted over the life of the loan.

The process wherein the depreciation portion of the gain is taxed as capital gain is called

Recaptured depreciation. When the sale price is more than the allowed depreciation amount, the difference is either ordinary income or capital gain, with the depreciation portion of the gain being taxed as capital gain in a process called recaptured depreciation.

What did the Taxpayer Relief Act do with regard to capital gains?

Reduced the top rate on profits from 28% to 20% for assets held at least 18 months, retroactive to May 7, 1997. Taxpayers in the 15% bracket now pay 10% tax.

What is the class life for residential and non-residential buildings?

Residential is 27.5 years. Non-residential is 39 years.

In what type of exchange is the replacement property acquired prior to transferring the relinquished property?

Reverse exchange

What is the formula for determining the amount realized from the sale of a home?

Sale price - costs of sale

What is straight-line depreciation?

Straight-line depreciation means that the depreciation is computed by dividing the building's cost by the number of years of its class life.

How does the IRS definition of a first-time home buyer differ from the standard definition?

Technically, the person doesn't have to be purchasing his or her very first home. The person qualifies under the tax rules as long as that person did not own a principal residence at any time during the two years prior to the acquisition date of the new home.

What are the two rules of the exclusion on capital gains for homeowners?

That the exclusion can be used once every two years and that the house was occupied by the seller two of the last five years.

In a 1031 exchange, what is the period within which a person who has sold the relinquished property must receive the replacement property?

The exchange period A person doing a 1031 exchange must receive the replacement property during the exchange period. This period ends at exactly 180 days after the date on which the person transfers the relinquished property or the due date for the person's tax return for the taxable year in which the transfer of the relinquished property took place, whichever situation is earlier.

Which of the following would prevent the homeowner from deducting home mortgage interest?

The homeowner is not legally liable for the loan.

What are the two critical timelines that apply to 1031 exchanges?

The identification period, during which the party selling a property must identify other replacement properties that he or she proposes or wishes to buy. This period is scheduled as exactly 45 days from the day of selling the relinquished property. The exchange period, within which a person who has sold the relinquished property must receive the replacement property. This period ends at exactly 180 days after the date on which the person transfers the relinquished property or the due date for the person's tax return for the taxable year in which the transfer of the relinquished property took place.

The Identification Period for 1031 exchange

This is the critical period during which the party selling a property must identify other replacement properties that he or she proposes or wishes to buy. It is not uncommon to select more than one property. This period is scheduled as exactly 45 days from the day of selling the relinquished property.

Delayed Exchange

This is the most common type of exchange. A delayed exchange occurs when there is a time gap between the transfer of the relinquished property and the acquisition of the replacement property.

Real estate investors must realize that one property can be exchanged for another property regardless of the property type, as long as it is held as an investment or for use in a trade or business. Also, a single property can be exchanged for several properties. Here are some examples:

Trade or business property, together with cash, for other trade or business property Metropolitan property for a farm or ranch Improved investment property for unimproved investment property A leasehold, with for at least 30 years to run, for a freehold Mineral interest in land to for a fee title in real estate

The Low-Income Housing Credit Program provides ______________ in federal income tax liability for project owners who develop rental housing that serves low-income households with incomes up to 60% of area median income.

a dollar-for-dollar tax credit

The party who receives boot in a tax- free exchange has

a net gain and must pay taxes on the difference.

Tax Basis ÷ (12 X Class life) = Monthly Depreciation Allowance

depreciation

exchange period

his period ends at exactly 180 days after the date on which the person transfers the relinquished property or the due date for the person's tax return for the taxable year in which the transfer of the relinquished property took place, whichever situation is earlier.

A/n ______________ is the financial result of an investment that has been sold at a profit.

realized capital gain

Amount Realized

sale price- costs of sale = amount realized