Section 4 Chapter 4

Sale of a Principal Residence

Married couples filing jointly can exclude up to $500,000 in profit on the sale of their primary home, with singles able to exclude up to $250,000. Taxpayers must have occupied the home as a primary residence for at least two of the last five years and can take advantage of the full exclusion every two years.

The correct answer is: Ad valorem.

Taxing real estate according to the value of the property is called: Select one: a. Ad valorem. b. Assessment. c. Appraisal. d. Capitalization.

The correct answer is: $0 because they used it for a personal residence for two of the last five years.

Ted and Alice are married and bought a house three years ago for $200,000. Two years later they moved out of the house and rented it out on a one-year lease. At the expiration of the lease they sold the house for $300,000. What is the taxable long-term gain on sale of the property? Select one: a. $100,000 because they did not own the house for five years. b. $100,000 because the house had been rented when they sold it. c. $0 because long-term gains on a personal residence are never taxable. d. $0 because they used it for a personal residence for two of the last five years.

economic value

The time period over which an improved property is expected to have value in excess of its salvage value is its

The correct answer is: Assessed value times tax rate.

Which of the following is used to determine annual real estate taxes? Select one: a. Sales price times tax rate. b. Assessed value times tax rate. c. Assessed value minus tax rate. d. Appraised value times tax rate.

Special assessment taxes

are for local improvements and only affect properties that will benefit from the improvement (sidewalks, sewers, etc.). The value of the benefit must exceed the cost of the improvement.

Ad valorem taxes

are levied by various state and local governments. "Ad valorem" is Latin for according to value.

The correct answer is: Assessed value.

Real estate taxes are based upon? Select one: a. Fair value. b. Assessed value. c. Full value. d. Current value.

The correct answer is: Tax based upon benefit received.

A special assessment is a? Select one: a. Re-evaluation of a property's value. b. Tax based upon benefit received. c. Tax levied equally against each property owner in the city or county. d. Tax levied only if ad valorem tax is sufficient to fund the proposed budget.

useful life

of an income producing property is the period of time that it is expected to remain economically profitable for the owner.

Equity

refers to the amount of "paid up" value there is in a piece of real property.

The correct answer is: By purchasing another like-kind investment property.

Gene owns a single-family home that he rents. He sold the property and realized a profit. Gene may defer payment of taxes on the profit: Select one: a. By investing 100% of the profits in an IRA account. b. By purchasing another like-kind investment property. c. By claiming the once-in-a-lifetime exemption. d. Because profits made on residential investment property are non-taxable.

Cost Basis

The gain or loss on sale of a property is determined by deducting the property's adjusted basis from the sale price. The property's basis starts at its purchase price (including closing costs).

Assessment

The local tax assessor's office in each community appraises all real property within its jurisdiction

The correct answer is: Be of like kind.

To qualify for a tax-deferred exchange, properties MUST: Select one: a. Have the same income. b. Have different incomes. c. Be of like kind. d. Have deeds in corporation names.

Capital Gains

When real estate is held for more than one year, any gain on sale is taxed at long term capital gains rate.

The correct answer is: Tax lien.

Which is the superior lien in the event of a foreclosure? Select one: a. Tax lien. b. First mortgage. c. Junior Mortgage. d. Home equity loan.

The correct answer is: $9,500

Broker Lynch has an exclusive listing to sell Jones' hardware store for a $4,500 commission. He took another exclusive listing to sell Brown's grocery store for a $5,000 commission. With the consent of Jones and Brown, Lynch arranges an exchange of these two stores. How much will Lynch make from this exchange? Select one: a. $4,500 b. $5,000 c. $9,500 d. No commission, because an exchange is not a sale

Tax rate

Each taxing body arrives at its tax rate separately. The amount of money needed by each taxing district is divided by the total assessment for all real estate located within the jurisdiction in order to arrive at that district's percentage (always divide the larger amount into the smaller amount if you want to get a percentage of the whole).

Appropriation

Each taxing district must adopt an annual budget. Each budget includes all expected expenditures for a designated 12-month period, which is then offset against all income expected from fees, other levels of government, revenue sharing, etc.

The correct answer is: Special Assessments.

Property taxes levied to finance special improvements serving a limited are called: Select one: a. Ad Valorem taxes. b. Special Assessments. c. District levies. d. None of the above.

Taxable income

is gross income minus allowable expenses and deductions. Real estate investors (and this includes homeowners) should make sure that they maximize their allowable deductions.

mill

is one-tenth of one cent or 1/1,000 of a dollar ($.001).

Appreciation

is the increase in the worth or value of property. Investors who buy land solely for its appreciation value usually plan on holding it for long periods of time. Most investors buy real property primarily for its income production, and secondarily for its appreciation potential.

Leverage

is the use of borrowed funds to finance an investment