Unit 2: Investors and Income Taxes

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

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

Which phase of the investment cycle is best known for write-offs and, depending on the project, tax credits?

Acquisition

C Corporations vs. Pass-Through Entities: Earnings subject to a flat 21% federal corporate income tax rate

C corporation

C Corporations vs. Pass-Through Entities: No longer subject to the AMT tax

C corporation

In a 1031 tax-deferred exchange, what role does the qualified intermediary serve?

Coordinates the exchange

Which of the following could an investor who sells an apartment house buy using a 1031 exchange?

Duplex, office building, or warehouse

A 1031 exchange can also be applied to a primary residence—similar to the capital gains exclusion. true or false

False

C Corporations vs. Pass-Through Entities: Business earnings appear on the owner's individual tax returns

Pass-through entity

C Corporations vs. Pass-Through Entities: Earnings taxed at the owners' individual tax rates

Pass-through entity

Earnings taxed at the owners' individual tax rates

Pass-through entity

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.

In a 1031 exchange, there are rules governed by Section 1031 of the Internal Revenue Code. The rules include _______.

The property in an exchange must be like-kind.

Income-producing residential, commercial, and industrial property can qualify for an exchange. Hotels and motels also can qualify. true or false

True

The 1031 tax exchange is used to defer paying taxes when there is an almost immediate repurchase of what's called a "like-kind" property. true or false

True

Leased property can also qualify for an exchange as long as the lease is for 25 years or more. true or false

false

C Corporations vs. Pass-Through Entities: Can take the QBI deduction

pass-through entity

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

A tax-deferred exchange for properties used for investment or business purposes is also referred to as a "like-kind" or 1031 exchange. true or false

true

Investors can defer capital gains using the 1031 exchange for real estate exchanges only. Personal property, such as equipment, cannot be tax-deferred. true or false

true