chapter 6: real estate investments

Straight Line Depreciation

A method of depreciation under which improvements are depreciated at a constant rate throughout the estimated useful life of the improvement.

Section 1031 Exchange

A section of the internal U.S. Internal Revenue Service Code that allows investors to defer capital gains taxes on any exchange of like-kind properties for business or investment purposes.

Appreciation

An increase in value.

Boot

Cash received in a tax-deferred exchange

Capital Gain

The profit realized from the sale of real estate or other investment. Capital loss occurs when an investment property or another type of investment is sold at a loss.

Cash received in a tax-deferred exchange is known as...? a. Levy b. Gains c. Boot d. Leverage

c. Boot

Depreciation

The amount of decrease in value of an asset that is allowed in computing the value of the property for tax purposes.

The cost to acquire a property, plus the cost of the physical improvements, minus the depreciation claimed as a tax deduction is equal to the...? a. Adjusted basis b. Capital gain c. Base investment d. Leveraged gain

a. Adjusted basis

The property's market value minus any debts is known as...? a. Equity b. Leverage c. Effective gross income d. Net operating income

a. Equity

A real estate security can include which of the following...? a. Mortgage notes b. Single family homes c. Shopping centers d. Self storage facilities

a. Mortgage notes

The new property in a 1031 exchange is referred to as the...? a. Replacement property b. Relinquished property c. Deferred property d. Capital property

a. Replacement property

A property with a higher intrinsic value can often demand a higher...? a. Sales price b. LTV c. Yield d. Interest rate

a. Sales price

An increase in value is known as...? a. Demand b. Appreciation c. Leverage d. Depreciation

b. Appreciation

Using the straight line depreciation method, residential property can be depreciated over how many years...? a. 20 b. 25 c. 39 d. 27.5

d. 27.5

A REIT is not subject to a corporate income tax if at least ......... of its income is distributed to shareholders? a. 10% (percent) b. 50% (percent) c. 80% (percent) d. 90% (percent)

d. 90% (percent)

The amount that a landlord can charge for rent is affected by which of the following...? a. The location of the property b. The amenities offered c. The condition of the property d. All of the above

d. All of the above

Real Estate Investment Trust (REIT)

A business trust which deals principally with interest in land, generally organized to conform to the Internal Revenue Code.

By using a high amount of leverage to purchase a property, the investor will experience a ........... degree of risk? A. Higher B. Lower C. Significantly lower D. Moderate

A. Higher

Real Estate Syndicate

An organization of investors usually in the form of a limited partnership who have joined together for the purpose of pooling capital for the acquisition of real property interests.

A syndicate real estate investor enjoys the same tax benefits as a direct ownership investor...? T (True) F (False)

T (True)

Equity

The property's market value minus any debts

Cash Flow

The total amount of money remaining after all expenditures have been paid, including the taxes, operating costs, and mortgage payments

Leverage

The use of debt financing of an investment to maximize the return per dollar of equity invested.

An investor purchased a property for $100,000. Over the course of 3 years, the investor built $5,000 worth of capital improvements. If the investor wrote off $8,000 in depreciation, what is the adjusted basis...? a. $92,000 b. $97,000 c. $105,000 d. $113,000

b. $97,000

The total amount of money remaining after all expenditures have been paid, including the taxes, operating costs, and mortgage payments is known as...? a. Gross income b. Cash flow c. Effective gross income d. Capital gain

b. Cash flow

The amount of decrease in value of an asset that is allowed in computing the value of the property for tax purposes is known as...? a. Inflation b. Depreciation c. Appreciation d. Deflation

b. Depreciation

The use of a mortgage when buying an investment property is an example of...? a. Negative amortization b. Leverage c. Depreciation d. Equity build-up

c. Depreciation

Why has real estate traditionally been a good investment...? a. Growth in property values have not outpaced inflation b. Property values have depreciated over time c. Growth in property values have outpaced inflation d. Growth in property values has been equal to inflation

c. Growth in property values have outpaced inflation

The use of a lower amount of leverage results in .............................. risk to the investor? a. Higher b. Significantly higher c. Lower d. No

c. Lower

A mortgage REIT's primarily source of income are from mortgage interest and...? a. Mortgage principal b. The sale of property c. Mortgage origination fees d. The cash flow from property

c. Mortgage origination fees

A method of depreciation under which improvements are depreciated at a constant rate throughout the estimated useful life of the improvement is known as...? a. Fixed-rate depreciation b. Variable depreciation c. Straight line depreciation d. Dynamic depreciation

c. Straight line depreciation

The cash flow a property generates is the result of which of the following...? a. The amount of rent received b. The amount spent on expenses to operate the property c. The amount paid to service the debt on the property d. All of the above

d. All of the above

Which of the following is an advantage to investing in real estate...? a. The use of borrowed funds to purchase investment properties b. Investment properties can serve as tax shelters c. Growth in property values typically outpaces inflation d. All of the above

d. All of the above

Real estate investments fall into two categories, real property and...? a. Personal property b. Leverage c. Tax shelters d. Real estate securities

d. Real estate securities

This is a section of the U.S. Internal Revenue Service Code that allows investors to defer capital gains taxes on any exchange of like-kind properties for business or investment purposes...? a. Section 13 b. Section 12-A c. Section 11 Exchange d. Section 1031 Exchange

d. Section 1031 Exchange