Ohio Real Estate Principles and Practices Module 8 - Taxes & Investment, Property Management

preparing to lease procuring screening leasing occupancy termination post move out

7 steps of tenancy cycle

B

A 20 unit apartment has not had a vacancy in five years. After analyzing the market what might the property manager recommend? A. enhance the apartments B. raise the rent C. reduce the rent D. make no changes

ad valorem

A Latin phrase meaning "according to value"; used to refer to taxes assessed on the value of property.

B Find cash flow: $2700 x 12 = $32400 $35000 - $32400 = $2600 $2,600 (cash flow) / $50,000 (acquisition cost) = .052

A buyer purchases a four unit apt bldg putting 10% down on a purchase price of $500K. Based on the financing terms the monthly principal and interest are approx $2700. The NOI is $35000 annually. What is the cash on cash return? A. 4.4% B. 5.2% C. 6.5% D. 8.8%

B

A buyer purchases a new home for $300K making a 20% down payment. What is the buyer's equity in this new home? A. $0 B. $60K C. $240K D. $300K

T

A fixed expense would the same whether a building as 100% occupancy or 50% occupancy T/F

B

A homeowner bought a house for $278K. they sold it nine years later for $264K. What is their percent of loss? A. 3.9% B. 5.0% C. 5.3% D. 9.5%

Home Acquisition Debt

A loan that a taxpayer takes out to buy, build, or substantially improve a qualified home.

Home Equity Debt

A loan that does not qualify as home acquisition debt but is secured by a qualified home.

C

A man purchases an investment property for $125K. he later sells it for $105K. What is his percent of loss? A. 8.4% B. 11.9% C. 16% D. 19%

C - 175000 / 2 = $87500 x .065

A property is appraised at $175000 and assessed for tax purposes at 50% value. What are the semi annual taxes if the tax rate is $65 per $1000? A. $1137.50 B. $2275 C. $2843.75 C. $5687.50

B 250,000 x 40% = 100,000 x .06 = $6,000 / 4

A property is appraised at $250K and assessed for tax purposes at 40% of value. What are the quarterly taxes if the tax rate is $6 per $100? A. $600 B. $1500 C. $6000 D. $12000

T

A property management agreement creates an agency relationship T/F

property owner/landlord & employing broker/property manager

A property management agreement is a personal services contract that creates an agency relationship between the ________ and the _________.

A, B, C, D

A property management agreement would likely provide authority for which of the following elements? Select all correct A. depositing rent payments into the owner's account B. handling security deposits from tenants C. interviewing prospective tenants and accepting applications D. negotiating leases between the owner and tenant

A

A property manager bases the operating budget on A. anticipated expenses and revenue B. current rental rates c. the state's landlord-tenant law D. supply and demand in the rental market

C

A property manager is chatting with a prospective client who asks a lot of questions about the property's amenities and residents. The property manager should inform the prospective tenant about A. the appraised value of the property B. a neighbor who has four children C. plans to turn the gym into a party room D. the racial composition of the tenants

C

A property manager pays for biannual inspections of the HVAC system in the building they manage. This is an example of what type of maintenance? A. corrective B. cosmetic C. preventive D. remedial

C - also knows as capital expenses

A property manager working on the operating budget for next year evaluates the property and makes a note that it might be necessary to replace the furnace. This should be included in the budget as A. cosmetic mtc B. net operating expenses C. reserves for replacement D. risk management

millage

A rate of taxation for real property calculated as $1 per $1,000 (or .001) of assessed value.

D $350,000 x 0.55 = $192,500 $192,500 / 39 = $4,936

A small strip mall has a market value of $350K. the land on which it sits is valued at 45%. What is the total amount the owner will be able to deduct next year as depreciation? A. $3808 B. $4038 C. $4654 D. $4936

special assessment

A tax levied only against properties that benefit from a public improvement (e.g., a sewer or street light) to cover the cost of the improvement; creates a special assessment lien (an involuntary lien).

T - ad valorem means according to value

Ad valorem refers to a tax that is based on the assessed value of property T/F

B - use of other people's money to make money

An investor borrows money from a bank to purchase a small office building. they can make the mortgage payments from the rent generated by the leases and still realize a profit. This is an example of what financing concept? A. appreciation B. leverage C. liquidity D. marketability

A

An investor bought a warehouse for $100K, paying $6K in closing costs. They spent $50K to add 1,000 square feet to the building a year later. When they sold the property for $180K, they paid $14K in closing costs. What is the realized capital gain? A. $10K B. $16K C. $30K D. $56K

D

An investor buys a vacant lot for $64500. They split it into two lots and sell them for $37200 each. What is their percent of profit? A. $8.5% B. 11.5% C. 13.3% D. 15.3%

C

An investor is looking for an investment property that requires lower mtc than the apt bldg they currently own. They're thinking about buying a whs instead. What is the primary reason the investor might consider a like-kind exchange? A. they can avoid paying commission on the sale of the apt building if they buy another property B. they can avoid transfer taxes on the purchase of the whs C. they can defer capital gains taxes on the sale of the apt bldg by reinvesting D. they can defer income taxes on the cash flow produced by the whs until they sell it

D

An office property can be depreciated over ____ years A. 15 B. 27 1/2 C. 31 1/2 D. 39

assessed value x tax rate

Annual Taxes = (equation)

A - obedience, loyalty, disclosure, confidentiality, accountability, reasonable care

As the property manager for owner Ross, Monica is held to high standards of good faith and loyalty, known as A. fiduciary obligations B. goodwill duties C. managerial obligations D. tenancy at will

D - joint as $500K exclusion

Carol and Doug purchased a home 25 years ago for $800K when they got married. They recently sold the property for $1.2M. On what amount will they have to pay the capital gains taxes? A. $400K B. $250K C. $150K D. $0

C

Convert the tax rate of $145 per $100 to a decimal A. 145.0 B. 14.5 C. 1.45 D. 0.145

Y

Do you think that a homeowner could lose equity in their home? Y/N

D - $250,000 x 33.33%

Ellen bought her house for $240K. If an assessor's opinion is that her property is worth $250K and the statutory assessment ratio is 33.33% what is the assessed value? A. $79,200 B. $79,992 C. $82,500 D. $83,325

F

If a property manager realizes that he is not charging market rent on a unit he should raise it immediately otherwise he would be neglecting his duty of loyalty and reasonable care to the property owner his client T/F

T - $25000 / 40%

In that taxing jurisdiction, a residential property assessed value is 40% of market value. If the assessed value of the property is $25K the market value is $62,500. T/F

F - applies only to principal residence

Investors Mr and Mrs Smith sell a rental property making $185K profit. They would not have to pay capital gains tax on their net proceeds bc it's below the $500K limit for married couples.

C

John is gathering up his paperwork to complete his income taxes. His home expenses include: Mortgage interest / month = $520; Property taxes = $3280; New deck = $5300. What is the total deduction John can take for the year? A. $3280 B. $6240 C. $9520 D. $14820

B

Kent is single and sold his principal residence for $325K. He bought the house 30 years ago for $150K. He had selling expenses of $15K. Kent meets all the conditions for the Section 121 exclusion. What is Kent's recognized gain or loss? A. -$90,000 B. $0 C. $160,000 D. $175,000

B

Land can be depreciated A. always B. never C. only for residential rental property D. sometimes

A

Landlord Louis is charging $600 a month to rent a one-bedroom unit in Hill Apartments. A similar one-bedroom in a building down the road rents for $700 a month. That $600 represents A. contract rent B. economic rent C. fair rent D. market rent

Y

Liz is getting ready to sell her house and has no idea what it might sell for. Before listing, Liz checks the county clerk's office and sees that a house next door, which just sold for $220K is assessed at $110K. Her house is assessed at $140K. Do you think Liz can get a rough estimate of how much she might be able to ask for her house from this information? Y/N

Y

Lucy has been applying every annual bonus she gets from work to the principal on her mortgage. Consequently she pays off her 20 year mortgage in 17 years. her lender charges her a prepayment penalty fee. Do you think she can deduct that fee from her income tax? Y/N

T

Mark lives in a village where the assessment rate is 40%. His house was determined to have a market value of $200K so the assessed value of his property is $80K T/F

C 220K-32K = 188K / 27.5

Molly bought an apt building for $220K. the land is valued at $32K. How much can she deduct from her taxes for depreciation next year? A. $4820.51 B. $5641.03 C. $6836.36 D. $8000.00

C

Of these which is most likely to be paid for with a special assessment? A. new fire engine B. new sports stadium C. sewer repair D. teacher's salaries

B

Of these which would least likely be an exchange that would allow an investor to defer capital gains taxes? A. a beet farm for silver mine B. a plane for an office building C. a shopping mall for an apartment building D. a warehouse for a vacant parcel of land

C

Olive bought a house for $365,500. She made a $54,800 down payment at closing. After 10 years, her balance on the loan is $41,900. Assuming no appreciation on the property, how much equity does Olive have? A. $54,800 B. $68,800 C. $123,600 D. $178,400

T

One way a property manager can manage risk is to assess potential hazards and insure the property appropriately T/F

D

Phillip bought an office building several years ago for $195K. He just sold it for $265K and bought an apt building for $270K as part of a 1031 exchange. when will Phillip have to pay capital gains taxes? A. never, by making the exchange, he avoids any capital gains taxes B. now that he sold the office building but only for the $5000 difference C. now that he sold the office building since this was not a like kind exchange D. when he sells the apt building assuming he does not exchange it for another property

B $1.80 per $100 = .0180 720 / .0180 = 40,000 40,000 / 50%

Property in town is assessed at 50%. The property tax rate is $1.80 per $100. If an owner's annual taxes are $720, what is the market value of the property? A. $40,000 B. $80,000 C. $90,000 D. $130,909

D

Property manager Hector is putting together his management proposal for the year. He does some analysis of the local market to see how many units are currently available. Once he has a handle on local supply and demand, he can use that information to make recommendations on A. identifying specific property risks B. projecting capital expenses C. revising occupancy standards D. setting appropriate market rent

tax shelter

Property or other investments that give owners certain income tax advantages, such as deductions for property taxes, mortgage interest, and depreciation.

D - $2120 / .047 - $45106 $45106 / .35 = $128874

Property taxes on a parcel of land are $2120. the property was assessed at 35% of market value and the tax rate is 47 mills. What is the market value of the real estate? A. $36190 B. $45106 C. $126665 D. $128874

F - only owners of properties within the special assessment district who will benefit from the improvement

Residents of the Happy Acres subdivision in Anytown request a special assessment to pay for new streetlights. If approved, this special assessment tax would be paid by all property owners in Anytown. T/F

straight-line depreciation

Simple depreciation method that takes the total cost of a building and divides that by the number of years the building is expected to be useful.

1031 Exchange

The Internal Revenue Code Section that allows a taxpayer to sell an investment property and purchase another investment property in its place without paying capital gains on the proceeds from the sale. Also called Like-Kind Exchange or Tax-Deferred Exchange.

liquidity

The ability to convert an asset to cash quickly

debt service

The amount of money paid in regular intervals toward reducing the principal and interest owed on a debt.

F

The cost associated with lawn care and snow removal would be considered a capital expense T/F

tax depreciation

The expensing of the cost of business or investment property over a set number of years, determined by the IRS to be an asset's useful life (27 1/2 years for residential property; 39 years for non-residential property).

B - $28,000 - 15,600

The operating statement on a rental property shows an effective gross income of $48,750 and a net operating income of $28,000. the owner pays $2,900 a year for insurance, $7,000 a year for property taxes, and $15,600 a year on the mortgage. What is the before tax cash flow? A. $2,500 B. $12,400 C. $18,100 D. $23,250

cash-on-cash return

The ratio of income generated by the property to the cash investment (down payment and settlement costs) in the property.

F - assigns an assessed value to each property to proportion the tax burden fairly

The role of an assessor is to determine the amount of property tax due T/F

capital gain

The taxable profit derived from the sale of a capital asset; the difference between the net sales price and the adjusted basis of the property

assessed value

The value placed on a property by a taxing authority for the purpose of taxation. With real estate, this value is usually a fraction of true value.

F - general agent because of broad range of duties

There are different types of agency based on the level of responsibility and authority that each has. when considering the authority given to a property manager, a property manager would be considered a special agent of the property owner. T/F

D - Percent (Tax Rate) x Whole (Assessed Value) = Part (Property Taxes) Convert 12 mills to 0.012 0.012 x $318,750 = $3,825

This year the school system collects 12 mills in property tax. Calculate the annual school tax for a property assessed at $318.750. A. $265.62 B. $382.50 C. $2,656 D. $3,825

T

To find cash flow you deduct the total annual debt service T/F

B - $1800 / .072

What must a property's assessed value be if its taxes are $1800 and the property is taxes at 72 mills? A. $12960 B. $25000 C. $129600 D. $250000

C - 8200 / 148900

What tax rate was used for a property assessed at $148900 that generates $8200 in annual taxes? A. 0.55 mills B. 5.5 mills C. 55 mills D. 550 mills

B

What tax rate was used for a property with an assessed value of $280K that owes $4200 in taxes? A. 15% B. 15 mills C. 1.5 mills D. 0.015 mills

B NOI = GI - vacancy losses = Effective GI - expenses

Which element does not figure into the equation to find net operating income? A. debt service B. effective gross income C. expenses D. vacancy losses

A, B, C, D

Which elements should be included in a property management agreement? Select all correct A. definitive termination date B. description of the property C. management authority and limitations D. management fee

D

Which is most likely a task that is outside of the scope of authority given to a property manager? A. authorize repair to the property B. initiate eviction proceedings C. maintain security deposits in an escrow account D. prepare the owner's income tax returns

C

Which list of items related to a principal residence may someone deduct from income taxes? A. interest paid on home equity loan, new roof, in-home office B. mortgage interest, losses not covered by insurance, mtc costs C. mortgage interest, property taxes, in-home office D. mortgage interest, property taxes, losses covered by insurance

A, B, C

Which of the following circumstances are exceptions to the two year provision of Section 121 of the Taxpayer Relief Act of 1997? Select all correct responses A. change in place of employment B. divorce C. health considerations D. marriage

D

Which of the following is least likely to be a primary obligation of a property manager/ A. create income for the owners B. fulfill the goals and objectives of the owners C. maintain or increase the property's value D. secure financing for capital improvements

B, D, E

Which of the following items are tax deductible? Select all correct responses A. depreciation of a new roof of a principal residence B. interest on a home equity loan C. maintenance costs on a principal residence D. mortgage interest on a vacation home E. property taxes on a principal residence

D

Which of these investment types do you think is the most liquid? A. antique furniture B. commercial real estate C. IRA (individual retirement account) D. shares of stock

B

While being respectful of a property owner's specific goals, a property manager will generally try to A. generate the highest gross income possible while maintaining the property B. generate the highest net income possible while maintaining the property C. set the highest rent allowable and offer as many amenities as possible D. set the lowest rent feasible and offer as many amenities as possible

A

Who are the parties to a management agreement? A. landlord and property manager B. tenant and landlord C. tenant and property manager D. tenant, landlord, and property manager

Y

You don't pay a special assessment tax that was imposed to put in sidewalks in your neighborhood bc you don't want the liability of keeping the sidewalks free of snow and ice. Since you did not vote for the improvement do you think the city can put a lien on your property to cover that assessment? Y/N

depreciation

a loss in value of a piece of property over the time is is expected to be useful

equity

an owner's unencumbered interest in property; the difference between the value of the property and the liens, such as a mortgage against it

cash flow / acquisition cost

cash-on-cash return = (equation)

must have owned and used as principal residence for at least two of last five years prior to date of sale (does not have to be princ residence on date of sale)

eligibility for exclusion of Taxpayer Relief Act of 1997 (when selling property)

property value - current balance of liens

equity = (equation)

amortization (loan repayment) & appreciation

equity can increase through ______ and ________

boot

extra, non like kind of property that can be a part of a like kind exchange to make up for pricing disparity between like kind properties

residential - 27 1/2 years commercial - 39 years

federal income tax laws set the recovery period on the loss in value of investment property as

single - 250K joint - 500K

limits on total allowable exclusions when selling a principal residence for single and joint returns

what you made / what you paid

percent of profit =

preventive corrective cosmetic

property manager's mtc responsibilities can generally be divided into three broad categories

return on investment

the gain/profit an investor experiences from an investment relative to its cost to acquire it

leverage

the investment strategy of using borrowed funds such as a mortgage to increase the potential return on an investment

cash flow

the measure of cash inflow and outlfow from an investment

return of investment

the protection of an investor's equity in an investment

appreciation

to increase in value

assessed rate tax rate

two factors required to calculate property taxes