Unit 3: Capital Gains Tax Shelters for Investment Properties Unit Exam

Approximately how much would an estate have to be worth to be subject to estate tax?

$11 million In 2019, only estates with combined gross assets and prior taxable gifts valued at more than $11.4 million are required to file an estate tax return.

Under Section _______ of the Internal Revenue Code, an investor in real property can sell that property, reinvest the proceeds in a "like-kind" property, and defer paying capital gains taxes.

1031

Which of the following could be subject to a gift tax?

A gift of $17,000 to your son

Rob purchased a property five years ago for $200,000. He put down $50,000 and financed $150,000. Today, the property is valued at $250,000. What is this an example of?

Equity build up Equity build-up is the increase in a property's value beyond what the investor originally invested as a down payment.

What is a tax on your right to transfer property at your death called?

Estate tax

Estate tax is calculated by first computing ______ , which is the total of the fair market value of all items owned by the deceased.

Gross estate value This returns gross estate value, from which deductions are applied to arrive at taxable estate value.

Which of the following is true regarding estate tax?

If your estate is worth less than $10 million, the estate tax will not apply.

Why is tax-free refinancing so attractive to investors?

It allows investors to refinance repeatedly, generating tax-free cash with which to make additional investments.

Which of the following statements best describes the 200% rule as it relates to tax-deferred exchanges?

The combined fair market value of the property (or properties) selected can't be more than 200% of the relinquished property. The combined fair market value of the property (or properties) selected can't be more than 200% of the relinquished property.

What is the capital gains exclusion amount?

$250,000 for single taxpayers, $500,000 for married couples filing jointly

Mildred is the seller in an installment sale of a commercial property. If her installment obligations at the end of the tax year are ________________, she has the option to pay the capital gains tax in full at sales time or through installment sale deferment.

$5 million or less The option for a seller in an installment sale to pay the capital gains tax in full at sales time, or through installment sale deferment, is available for both commercial and residential properties with installment obligations at the end of the tax year of $5 million or less.

Samuel wants to do a 1031 exchange. He sold his investment property and has identified the property he'd like to buy next. Within how many days must he close on this property in order for it to qualify as part of the exchange?

180

Hiram plans to do a 1031 tax-deferred exchange. He just sold his property. How many days does he have to close on a new property?

180 Investors who want to use the 1031 tax-deferred exchange must identify the new property within 45 days of closing and must close within 180 days of the date of sale of the first property.

What type of professional must an investor use to conduct a tax-deferred exchange?

A qualified intermediary

Harvey 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

What is a gift tax?

A tax on property received by one person when nothing of value was given in return A gift tax is a tax on property received by one person when nothing of value (or less than full value) was given in return.

In calculating estate taxes, lifetime taxable gifts are __________ to net value, and the tax is computed.

Added Lifetime taxable gifts are added to the net value, and the tax is computed. The tax can be reduced by applying the available unified credit.

Which of the following statements best describes 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 as to fair market value as long as debt load requirement is met.

Which of the following is an example of a reverse exchange?

An investor finds and closes on an investment property and then decides to immediately sell another investment property. If an investor finds and closes on an investment property and then decides to sell another investment property, this is a reverse exchange. The investor is still required to work within the 45- and 180-day deadlines.

The increase a property's value beyond what the investor originally invested as a down payment is called ____________.

Equity build-up Equity build-up is simply the addition in value to the property beyond what the investor originally invested as a down payment.

Honey is the seller in an installment sale of a residential property. She is paying her capital gains tax through installment sale deferment, and her installment obligations at the end of the tax year will be less than $5 million. Given her situation, which of the following statements is true?

Honey will only pay taxes proportionate to the gain collected each year. Through installment sale deferment, Honey will pay taxes proportionate to the gain collected each year. Her installment obligations will be less than $5 million, so she won't be subject to taxes on gains at the ordinary income rate at the time of sale.

What exemption to the "every two years" rule concerning the capital gains exclusion allows a seller to claim a partial exclusion when the seller is forced to sell early?

Involuntary conversion The exemption is known as an involuntary conversion. An example would be a divorcing couple who purchased a home only a year ago and were forced to sell their home in their divorce settlement.

You have an investor client who's interested in learning more about the advantages of a 1031 tax-deferred exchange. What might you tell him?

It allows investors to defer capital gains taxes when selling a property, provided they buy a like-kind property within a set amount of time. An advantage to a 1031 tax-deferred exchange is that it allows investors to defer capital gains taxes when selling a property, provided the money is rolled into another like-kind purchase within the deadline.

Which of the following is true regarding the federal gift tax?

It applies even if the donor didn't intend it to be a gift. The gift subject to a gift tax may be in the form of money, real estate or other item of value. A gift tax applies whether the donor intended the transfer to be a gift or not.

The use of one investment to finance another is called ___________.

Pyramiding Pyramiding makes use of one investment to finance another. This can be done through selling or refinancing the first property, then using that equity to purchase another property.

Which of these property owners is eligible to take advantage of a 1031 tax-deferred exchange?

Reggie sells an apartment complex and purchases a new complex a month later in a different part of the city. Reggie is the only owner using the property for investment or business purposes who's identified the property within the required deadline for a tax-deferred exchange.

A like-kind exchange, or 1031 exchange, is also referred to as a ______.

Tax-deferred exchange

Short-term capital gains are taxed at a ______.

Taxpayers' marginal tax rate Short-term capital gains are taxed at the taxpayer's marginal tax rate.

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. Like-kind is a requirement. The replacement property has to come with the same or greater debt load for the investor, and the basis of the original property carries over to the new property. It must also be a non-owner-occupied (investment) property.

Which of the following statements best describes the 95% rule as it relates to tax-deferred exchanges?

The total value of the property (or properties) selected as exchanges must be at least 95% of the value of the property being sold. The 95% rule says that an investor can identify multiple properties with no regard to their value if the exchange they're moving into has a total value of at least 95% of the value of the property they're selling.

Bill gave his son, Chandler, $40,000. He was surprised to learn that it was subject to a tax. What type of tax is this?

gift tax