11 INVESTING, TAXES & BANKRUPTCY
The IRS allows investors to delay paying taxes on their gains using what: Select one: a. IRS 1019 Ordinance b. 1031 exchange c. Tax difference option d. Bulk tax transfer option
b. 1031 exchange
Capital Improvements are: Select one: a. Things that take place on a yearly basis b. Adding onto a home to add 4th bedroom to a 3 bedroom property c. Paying the taxes on the property d. Repairing an existing foundation
b. Adding onto a home to add 4th bedroom to a 3 bedroom property
An installment agreement in real estate investing could be summarized as: Select one: a. A method used to repay loan costs, settlement costs and title fees b. Sellers carry the loan for a buyer over time c. Where a seller can pay taxes to the IRS from the proceeds of a sale over time d. Where the bank settles for less than amount owed
b. Sellers carry the loan for a buyer over time
What is the cash flow for a lessor who receives $15,000 a year in rent payments and has $12,000 a year in associated/operating expenses?
A: Cash Flow = Gross Income - expenses and loan costsCash Flow = $15000 - $12000 = $3,000
An investor purchases a home for $150,000 and puts $15,000 worth of labor and materials into it. She then sells the home for $181,500. What was the ROI?
A: R.O.I. = Return on Investment = profit from investment / cost of investment Cost of investment = $150,000 + $ 15,000 = $165,000 Profit from investment = $181,500 - $165,000 = $16,500R.O.I = 10%
Q: Your client, a seller, accepted an offer on their house yesterday. Today however, they informed you that they are filling for bankruptcy and hope that they can close on their home sale SOON! How do you proceed?
Agents are deemed responsible for disclosing the possibility that the sellers could not perform due to a pending bankruptcy under fiduciary duties to all .Same thing holds true for buyers. So, I'll disclose that bankruptcy for my business transactions as well.
You are driving with a client who you know is looking to start flipping houses. They trust you and your knowledge. What do you suggest to your client when it comes to setting up an LLC or some other type of corporation for my flipping business?
As a real estate agent, you are not able to provide legal advice or financial advice. You should either direct them to a professional of state your opinion, but never give advice on taxes, liabiliites, gains, losses, future values, construction, legal matters and the list goes on.
Which of the following could not be depreciated: Select one: a. Commercial properties b. Investment REIT owned Properties c. Rental properties d. Land
d. Land
What is a "boot"?
Boot is the money taxed at time of exchange that investor took from sale.
How are capital gains calculated?
Capital Gains = Difference between net proceeds and the adjusted basis.
What is required for a primary residence to be exempt from capital gains tax?
Following are the requirements for a primary residence to be exempt from capital gains tax.• The sale of personal real estate could be capital gains tax exempt• Must be owner occupied as primary residence• Must occupy the home for at least 2 out of the previous 5 years• Tax exempt profits depend on marital statu so $250,000 profit tax free for unmarried individual so $500,000 profit tax free for married couples
How soon after a foreclosure would I need to wait in order to purchase another home using a government backed loan?
If a borrower defaulted and was foreclosed on, there is a waiting period of 7 years before they can obtain a government backed or insured loan. If you could prove some sort of extenuating circumstances, that time could be reduced to 4 years, but that is hard to prove. Now it is possible to get a non-conforming loan after a foreclosure, but this was discussing a Government insured loan.
In regards to lien holder position, why could your loan for a new hot tub have higher rates/terms than your mortgage?
In a home, the first mortgage is in first line to get paid back, then 2nd and 3rd. Lender #2 or #3 are taking a larger risk, hence usually higher rates/terms.
What does a lender do to compensate for the increased risk of Unsecured Debt?
In case of Unsecured Debt, Lender are taking a larger risk, hence usually compensate it for higher rates/terms.
What tax benefits would an investor gain by agreeing to an Installment Agreement with a buyer?
Installment Agreement with a buyer is better for the seller since they don't have to pay capital gains tax on the entire gain but the gains tax over the life of the seller carry.
For how many years can a residential asset depreciate? Does this apply to land as well?
It is assumed by the government that a residential asset's life span of usefulness is 27.5 years. You can never depreciate the land portion of total value.
How would the cash flow in the above scenario be taxed? Is this considered Earned or Passive income?
It is passive income as income derived from assets, not actively working.
Regarding the above scenario, what would the ROI be if the investor overpaid for the property and was only able to sell it for $160,000 after completing the same repairs and upgrades?
R.O.I. = Return on Investment = profit from investment / cost of investment Cost of investment = $150,000 + $ 15,000 = $165,000 Profit from investment = $160,000 - $165,000 = - $5000R.O.I = - 3.03 % (Loss)
What is the difference between Earned Income and Passive Income?
The income derived from your daily working activities is Earned Income. While, income derived from assets, not actively working income is Passive Income.
In your opinion, why is short term investing considered riskier than long term investing?
There is typically a higher degree of risk for short term investing when working in volatile markets. On the other hand, the advantage of long term investing is by leveraging, investors hope to see an increase in value based on economic factors (Demand, Utility, Scarcity, Transferability)
Under a chapter 13 bankruptcy, a debtor has how long to repay their debts: Select one: a. 60 months b. Unlimited time c. 18 months d. 24 months
a. 60 months
Speculation is the term used to describe an (a) investor who: Select one: a. Is looking to profit in the near future b. Would hold a for long term c. Developers of properties in high impact zones d. A property manager who signed a 2 year lease
a. Is looking to profit in the near future
Which of the following would potentially not be a reason an investor would want to invest in real estate? Select one: a. Tax free investing b. Depreciation c. Possible to defer taxes d. Long term gains
a. Tax free investing
Which of the following would potentially not be a reason an investor would want to invest in real estate? Select one: a. Tax free investing b. Long term gains c. Depreciation d. Possible to defer taxes
a. Tax free investing
Deferring of taxes is possible on: Select one: a. The sale of a property that was used as a storage facility b. The primary residence as long as less than $500,000 profit for a married couple c. Inherited land that was owned by your parents d. The disposal of the families vacation home
a. The sale of a property that was used as a storage facility
When discussing long term investing strategies, rental property comes in and you suggest that it's a great idea to invest in rental properties due to the tax depreciation benefits and you state you can find some great rentals that could produce positive cash flow in the first year. A rental property with cash flow would best be described by explaining to your client which formula? Select one: a. Net Income - Expenses b.Gross Income - Net Income c. Gross Income - Expenses d.Gross Income - Vacancies
c. Gross Income - Expenses
Which of the following is an example of a secured debt: Select one: a. Personal line of credit b. Credit card c. Mortgage d. Payday loan
c. Mortgage
Barney Rubble paid $165,000 for a rental property in 2003. Over the years, he has made improvements that totaled $33,000. In 2009 he was forced to sell for $155,000 and had total closing costs of $9000. What was his tax liability: Select one: a. Tax gain of $34,000 b. Tax gain of $42,000 c. Tax loss of $52,000 d. Tax loss of $10,000
c. Tax loss of $52,000
Which of the following is not a long term gain? Select one: a. The sale of a building that was being rented for 4 years b. A commercial Strip mall is sold as part of a REIT that held it for 18 months c. The sale of a property 40 days after you and your spouse acquired it d. The sale of a primary residence owned for 9 years
c. The sale of a property 40 days after you and your spouse acquired it
Which of the following is not a long term gain? Select one: a. The sale of a primary residence owned for 9 years b. A commercial Strip mall is sold as part of a REIT that held it for 18 months c. The sale of a property 40 days after you and your spouse acquired it d. The sale of a building that was being rented for 4 years
c. The sale of a property 40 days after you and your spouse acquired it
Clients Mary and Joe Scatterbrain are going to stop making payments on their home and quickly list it with Realtor Mary Reasonable. Can Mary list this home and why/why not? Select one: a. No, it would not be possible to transfer title due to the buyers walking away b. Yes, if her broker would allow it c. Yes, if she finds out and notifies the public d. No, it would not be allowed since it would go into foreclosure
c. Yes, if she finds out and notifies the public
A married couple bought their family home outside of Flagstaff in 1989 for $330,000 and then when they decided to sell, the house was in rough shape since no maintenance had been done on it. The best offer that they received was $225,000 in 2018. They closed on the sale and paid out a total of $15,000 in seller fees. What is their combined tax liability? Select one: a. Tax loss of $105,000 b. Not enough information to determine the ANSWER c. Zero d. Tax loss of $90,000
c. Zero (no tax loss on primary residence)
Banker Bob and his wife built their own home in Paradise Valley for $1,350,000 and lived happily there for 10 years. They sold the home for $2,350,000. What was their tax liability: Select one: a. $1,000,000 b. $2,500,000 c. Nothing since it was their primary residence d. $500,000
d. $500,000
This bankruptcy type is the shortest duration usually: Select one: a. Chapter 13 b. Chapter 12 c. Chapter 11 d. Chapter 7
d. Chapter 7
Joan d'Arc is walking away from her property and is declaring a chapter 7 bankruptcy. She had an original mortgage used to buy the property and a personal line of credit that she used when she added a pool and backyard landscaping. In addition, she had a lien on the property from the house painters, and she has run her credit cards up to their limits. Which loans are wiped out entirely? Select one: a. Credit cards b. Mortgage, credit cards, line of credit and painters lien c. Mortgage, credit cards, line of credit d. Credit cards and personal line of credit
d. Credit cards and personal line of credit
Farmer Fran wanted to avoid paying capital gains tax so she traded her 40 acres of land for Rancher Randy's cattle farm. Rancher Randy gave Farmer Fran an extra $50,000 since her property was bigger and worth more. Who gets taxed on what? Select one: a. Farmer Fran on the boot of $50,000 and Rancher Randy on the loss of $50,000 b. Rancher Randy on the loss of $50,000 c. Neither gets taxed since it was an exchange d. Farmer Fran on the boot of $50,000
d. Farmer Fran on the boot of $50,000
When discussing long term investing strategies, rental property comes in and you suggest that it's a great idea to invest in rental properties due to the tax depreciation benefits and you state you can find some great rentals that could produce positive cash flow in the first year. A rental property with cash flow would best be described by explaining to your client which formula? Select one: a. Gross Income - Vacancies b. Net Income - Expenses c. Gross Income - Net Income d. Gross Income - Expenses
d. Gross Income - Expenses
