17. Income Tax Aspects of Real Estate
What type of professional must an investor use to conduct a tax-deferred exchange
A qualified intermediary
In relation to a 1031 exchange, which of these represents "boot"
Any cash funds the investor receives from the sale proceeds of a 1031 property Cash funds an investor receives from the sale proceeds of a 1031 property are referred to as boot, and boot is taxable.
Payden sold his home and made a nice profit. His real estate agent told him he can offset his capital gains from what home costs
Capital improvements
To whom would a 1031 tax exchange usually appeal
Investors
The capital gains exclusion for couples filing jointly who have lived in their primary residence at least two of the five years immediately preceding the sale of the home is up to $500,000. What is the capital gains exclusion for single taxpayers
$250,000
After operating the firm for 17 years, Trethlon Manufacturing just sold its entire operation for $5.7 million. The adjusted purchase price was $3.9 million. While the corporation ran the business, it spent $970,000 on capital improvements. Real estate commissions and other costs of the sale were $358,000. What is Trethlon's capital gain
$472,000
Which section of the Internal Revenue Code allows the owner of real property to sell that property, then reinvest the proceeds in a "like-kind" property and defer paying any capital gains taxes
1031
Capital gains taxes are owed when a property is sold. What percentage is used to calculate capital gains taxes when a person is in the 33% tax bracket
15% Capital gains from property sales are taxed at a lower rate than other taxes. For the 33% income tax bracket, the taxable amount is 15%.
Bob just closed on his investment property. He's already identified a replacement property that he'll be exchanging into by using a 1031 tax-deferred exchange. How many days does he have to close on his replacement property
180
John wants to do a 1031 tax exchange with a property he just sold. How many calendar days does he have to identify a new property for the exchange
45 The new property must be identified within 45 calendar days from the sale of the relinquished property.
Jose is an investor who found and closed on an investment property, then decided to sell a property other than the one originally marked for the exchange. What is this an example of
A reverse tax-deferred exchange
Which phase of the investment cycle is best known for write-offs and, depending on the project, tax credits
Acquisition
Which of the following is earned income (i.e., income earned directly through the taxpayers' efforts)
Active
What is the three-property rule as it relates to tax-deferred exchanges
An investor can identify up to three replacement properties and not encounter a restriction regarding fair market value as long as debt load requirement is met.
What is a reverse exchange
An investor finds and closes on an investment property and then decides to immediately sell another investment property.
Which of these best describes boot and it's tax treatment
Boot refers to any cash received by an investor from the sale proceeds in a 1031 exchange. Boot is taxable. Boot refers to any cash received by an investor in a 1031 exchange. Any funds that flow directly to the investor are called boot, and these funds are taxable.
Breeja sold her investment property for $330,000. Her adjusted basis in the property was $253,000. The difference between this sale price and the adjusted basis is a ______.
Capital gain Capital gains are the sales price less the adjusted basis.
In a 1031 tax-deferred exchange, what role does the qualified intermediary serve
Coordinates the exchange
John sells his single-family home and purchases a new home for his family to reside in. Marcus owns a single-family home but rents it out to a co-worker while he is on an extended two-year military tour overseas. Donald sells an apartment complex and purchases a new complex in a different part of the city. Which of these consumers is most likely to take advantage of a 1031 tax-deferred exchange
Donald Remember, the investment must be held for investment or business purposes.
Which of the following could an investor who sells an apartment house buy using a 1031 exchange
Duplex, office building, or warehouse
Which of the following statements related to 1031 tax-deferred exchanges is true
Foreign investors may participate.
After owning a tattoo parlor for 12 years, Gilbert sold it. Gilbert's accountant calculated a $46,000 capital gain. Which one of the following statements is true
Gilbert will pay tax on the gain at the long-term capital gains rate.
Why do investors have a special interest in the impact income taxes have
Income tax is a significant factor in return on investment.
Which of the following is a true statement about deducting interest on mortgages taken out in tax years 2018 to 2025
Interest on the first $750,000 of mortgage debt is deductible for married couples filing jointly or $375,000 for married couples filing separately. For tax years 2018 to 2025, interest on the first $750,000 of mortgage debt is deductible for married couples filing jointly.
What advantage does the 1031 tax-deferred exchange offer
It allows investors to defer capital gains taxes when selling a property, provided they buy another property.
A taxpayer can claim a capital gains exclusion _______.
Once every two years The exclusion may only be taken once every two years.
Which phase of the investment cycle includes deductions for mortgage interest and property taxes
Ownership This is the ownership phase.
What type of income is received through activities not directly related to active participation in a business or earnings from wages, such as rental income
Passive
Clay and Myra just bought a home. Based on where they are in the property ownership life cycle, which tax-related item is likely to be of the most concern to them
Points deduction In the acquisition stage of property ownership, owners are typically more concerned with deducting the points they paid and any retirement account distributions they took to purchase the property.
Which one of the following is income that comes from investments, which includes capital gains, interest, and dividends
Portfolio
Kayla purchased a home in January, fixed it up, and then sold the property in May of the same year for a gain of $45,000. What type of capital gain is this
Short-term Short-term capital gains apply to properties owned for one year or less.
______ are taxed at a taxpayer's marginal tax rate.
Short-term capital gains
______ are taxed at a taxpayer's marginal tax rate.
Short-term capital gains Short-term capital gains are taxed at the taxpayer's marginal tax rate.
A like-kind exchange, or 1031 exchange, is also referred to as a ______.
Tax-deferred exchange
What is the 200% rule as it relates to tax-deferred exchanges
The combined fair market value of the property (or properties) being exchanged into cannot be more than 200% of the relinquished property.
Regarding 1031 exchanges, which of these statements regarding debt load in an exchanged property is true
The debt load for the new property must be equal to or greater than the debt load for the previous property, or the difference may be taxable. The new property's debt load must be equal to or greater than the debt load for the previous property, or the seller may owe taxes on the difference.
For tax years 2018 to 2025, a borrower can write off the interest on a home equity loan only if ______.
The funds are used to buy, build, or improve the home that secures the loan For tax years 2018 to 2025, the funds must be used to improve the home that secures the loan. Other restrictions also apply.
Which one of the following statements about income tax rates is correct
The tax rate on long-term capital gains is less than the tax rate for ordinary income. Long-term capital gains are taxed at a lower rate than ordinary income. Short-term capital gains are taxed at the same rate as ordinary income.
Short-term capital gains are taxed at ______.
The taxpayer's marginal tax rate Short-term capital gains are taxed at the taxpayer's marginal tax rate.
What is the 95% rule as it relates to tax-deferred exchanges
The total value of the property (or properties) being exchanged is at least 95% of the value of the property being sold. The 95% rule says that your client can identify a whole bunch of properties with no regard to their value if the exchange they're moving into has a total value of at least 95% of the value of the property they're selling.
Which of the following is a true statement about pass-through entities
Their earnings are taxed at the owners' individual tax rates. Pass-through entities, such as sole proprietorships, partnerships, LLCs, and S corporations, pass their income to the individual owner's income tax return, and they're taxed at individual income tax rates, rather than corporate rates.
John wants to do a 1031 tax exchange. He just sold his property. How many days does he have to close on a new property
180 Investors who want to use the 1031 tax-deferred exchange must identify the property within 45 days and must close within 180 days.
What type of capital gain is considered short term
A gain on a property owned one year or less Short-term capital gains apply to properties owned for one year or less.
What type of IRS deduction can be taken for a vacation home
Property tax
Over the life span of owning a home, homeowners may be able to take advantage of what tax benefits
Property tax deduction
Which stage of the investment cycle is an investor in when there is depreciated basis and tax-deferral through 1031 exchanges
Reversion This is the reversion stage in the investment cycle.
What type of investment strategy is most similar to a 1031 tax-deferred exchange
Rolling over funds from one IRA into another The 1031 exchange is similar to rolling over retirement funds the investor rolls over the capital gains from the sale of one property into the purchase price of the next property, deferring (but not avoiding) taxes on that gain.
What types of capital gains may property owners encounter
Short- and long-term