Az income tax aspects
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.
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%
cost recovery depreciation
An accounting technique in which the IRS allows for depreciation of a rental property over the course of the property's economic life. For example, the owner of a residential rental property can divide the property's cost basis by 27.5 years to determine the annual depreciation expense for income tax purposes.
Which of the following is a true statement about deducting interest on mortgages taken out in tax years 2018 to 2025?
B. Interest on the first $750,000 of mortgage debt is deductible for married couples filing jointly or $375,000 for married couples filing separately.
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.
Which of the following could an investor who sells an apartment house buy using a 1031 exchange?
Duplex, office building, or warehouse
depreciation
Loss in property value from any cause
Which one of the following is income that comes from investments, which includes capital gains, interest, and dividends?
Portfolio
What type of IRS deduction can be taken for a vacation home?
Property tax
______ are taxed at a taxpayer's marginal tax rate.
Short-term capital gains
considered pass-through entities, which means that business income
Sole proprietorships, partnerships, LLCs, and S corporations
Adjusted selling price
The selling price of a property minus the certain selling expenses. This may also be called amount realized.
The Tax Cuts and Jobs Act (TCJA) still allows homeowners to deduct home equity loan interest
but only if the funds were used to buy, build, or improve the home. There are also additional stipulations
In a 1031 tax-deferred exchange, what role does the qualified intermediary serve?
coordinates the exchange
active income
earned, ordinary): Income derived from employment. Examples include salaries, tips, and commissions
Investors can defer capital gains using the 1031 exchange
for real estate exchanges only Gains on personal property, such as equipment, cannot be tax-deferred.
Which of the following statements related to 1031 tax-deferred exchanges is true?
foreign investors may participate
are earned on assets held for more than a year.
long term capital gains
A taxpayer can claim a capital gains exclusion _______.
once every 2 years years
Mortgage interest and property taxes are deductible
ownership
Over the life span of owning a home, homeowners may be able to take advantage of what tax benefits?
property tax deduction
1031 Exchange
"under Internal Revenue Code section 1031, a tax-deferred exchange of "like kind" properties."
Individuals who are married but filing separately can deduct mortgage interest up to
$375,000.00
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 Trethlon's adjusted basis in the property is $3,900,000 + $970,000 + $ 358,000 = $5,228,000. Then, $5,700,000 - $5,228,000 = $472,000.
Capital gains exclusion
$500,000 excluded on principal residence two of the last five years, married filing jointly $250,000 excluded on principal residence two of the last five years, single
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 days
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 days
Leased property may qualify for an exchange as long as the lease is
30 years or more
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
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 days
short term capital gain
: Increase in capital resulting from the sale of property held for one year or less; taxed at the taxpayer's marginal (ordinary) tax rate
depreciable
: The acquisition cost of a depreciable property minus its salvage value. The salvage value what the asset could be sold for at the end of its useful life.
economic life
: The useful life of a residential or commercial rental property for tax depreciation purposes. Residential property has a life of 27.5 years. Commercial property has a life of 39 years. Only the value of the buildings can depreciate, the value of the land cannot depreciate.
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
also referred to as a like-kind or 1031 exchange. Investors must meet strict timelines and IRS rules.
A tax-deferred exchange for properties used for investment or business purposes
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.
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
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
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?
D. Points deduction owners are typically more concerned with deducting the points they paid and any retirement account distributions they took to purchase the property.
long term capital loss
Decrease in capital resulting from the sale of property held for at least one year and a day
short term capital loss
Decrease in capital resulting from the sale of property held for one year or less
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.
tax deductions
Homeowners may be able to deduct points, property taxes, and mortgage interest, which are the primary tax deductions available for primary residences, vacation homes, or rental properties. For tax years 2018 to 2025, homeowners married, filing jointly, can deduct home mortgage interest on the first $750,000 of mortgage debt Individuals who are married but filing separately can deduct mortgage interest up to $375,000 The Tax Cuts and Jobs Act (TCJA) still allows homeowners to deduct home equity loan interest, but only if the funds were used to buy, build, or improve the home. There are also additional stipulations.
passive income
Income derived from activities not directly related to active participation in a business or earnings from wages. Examples include rental income.
portfolio income
Income derived from investments. Examples include income from capital gains, interest, and dividends
long term capital gain
Increase in capital resulting from the sale of property held for at least one year and a day
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.
works similarly to an itemized deduction and reduces income taxes for pass-through entities.
The Qualified Business Income (QBI) deduction, created by the Tax Cuts and Jobs Act (TCJA)
capital gain or loss
The adjusted selling price minus the adjusted basis. A positive number means there was a gain. A negative number means there was a loss.
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.
adjusted basis
The final basis for taxing purposes computed by taking acquisition costs plus capital improvements and subtracting depreciation taken.
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
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.
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.
Which of the following is a true statement about pass-through entities?
Their earnings are taxed at the owners' individual tax rates.
capital gain
a profit from the sale of property or of an investment.
What type of professional must an investor use to conduct a tax-deferred exchange?
a qualified intermediary
The property is acquired; write-offs for points; tax credits are deductible
acquisition
Which phase of the investment cycle is best known for write-offs and, depending on the project, tax credits?
acquisition
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 ______.
capital gain
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 phase of the investment cycle includes deductions for mortgage interest and property taxes?
ownership
A 1031 exchange is similar to r
r retirement funds because 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. Investors must pass proceeds from the sale through a qualified intermediary. If the investor receives any cash proceeds directly, that amount becomes taxable. All proceeds must be reinvested; retained cash proceeds (aka boot ) are taxable. The replacement property must involve an equal or greater level of debt than the relinquished property. Otherwise, the investor must pay taxes on the difference or put in cash to offset the lower level of debt in the replacement property. The 95% rule as it relates to tax-deferred exchanges says that the client can identify a number of properties without regard to their v
Sale of the property; depreciated basis; tax-deferral through 1031 exchanges.
reversion
Which stage of the investment cycle is an investor in when there is depreciated basis and tax-deferral through 1031 exchanges?
reversion
apply to properties owned for one year or less.
short term capital gains
A like-kind exchange, or 1031 exchange, is also referred to as a ______.
tax deferred exchange
Short-term capital gains are taxed at ______.
tax payer marginal rate
Rate of return
the amount that is gained or lost on an investment, which is expressed as a percentage.