Deck 20: Income Taxation and Value

Question 1

Congressional legislation has repeatedly altered the period of time over which rental real estate may be depreciated.Currently,residential income producing property (e.g.apartments)may be depreciated over no less than:

A)3 years
B)7 years
C)15 years
D)27 ½ years

Answer 1

D

Question 2

Johnson Builders is in the new residential construction business.They built a house that sat empty for 6 months after its completion.This type of property would be categorized as a:

A)personal residence
B)dealer property
C)trade or business property
D)investment property

Answer 2

B

Question 3

The value of a property can be thought of as having two components,a land component and a building component.Since the land component of the original cost basis is not depreciable,it is important to understand how much of the property's value is typically attributed to the land for tax purposes.As a general rule,the value of land constitutes what percentage (expressed as a range)of the total value of a commercial property?

A)0% to 10%
B)10% to 30%
C)30% to 50%
D)50% to 70%

Answer 3

B

Question 4

All taxable income from investment property sales must eventually be classified as either ordinary income,depreciation recapture income,or capital gain income.What is the
Maximum tax rate that an investor can be charged on depreciation recapture income?

A)10%
B)15%
C)25%
D)35%

Question 5

For purposes of federal income taxes,real property is classified into four categories.With which of the following types of real estate is the investor able to reduce his taxable income to reflect the wear and tear of a property over time?

A)Personal residence
B)Dealer property
C)Trade or business property
D)Investment property

Question 6

U.S.tax law is designed to raise revenues for the operations of the federal government and to promote certain socially desirable real estate-related activities.Tax legislation is combined into a single section of the federal statutory law commonly referred to as:

A)Section 1231
B)Section 1031
C)the Internal Revenue Code
D)Tax Reform Act

Question 7

There are three main types of income subject to federal taxation.Which of the following types of income includes income generated from rental real estate investments?

A)Active income
B)Portfolio income
C)Passive activity income
D)Residual income

Question 8

In a like-kind exchange,property owners must meet a number of conditions in order to be eligible to take advantage of this tax deferment.One criterion is for the exchange to be between "like-kind" properties.Which of the following exchanges represents an example of an eligible "like-kind" exchange?

A)An apartment property for shares in a publicly traded REIT
B)A retail property in the U.S.for a retail property in China
C)An office property for a principal residence.
D)A retail property for an office property,both within the U.S.

Question 9

Current tax law allows investors to take tax credits for the cost of renovating or rehabilitating older or historic structures and for the construction or rehabilitation of qualified low-income housing.Which of the following statements regarding tax credits is true?

A)A $1 tax credit reduces the investor's tax liability by an amount dependent on the individual's income tax bracket.
B)A $1 tax credit reduces the investor's tax liability by $1.
C)A $1 tax credit increases the investor's taxable income by $1
D)A $1 tax credit has exactly the same impact on an investor's tax liability as a tax deduction.

Question 10

Under certain circumstances,investors are permitted to reduce the amount of the taxable income that they report by an amount that is intended to reflect the wear and tear of an asset over time.This is commonly referred to as:

A)appreciation
B)depreciation
C)capital gains
D)capital losses

Question 11

When an investment appreciates in value during the investment holding period,the appreciation is generally taxed at which of the following rates?

A)Ordinary tax rates
B)Capital gain tax rates
C)Portfolio income tax rates
D)Active income tax rates

Question 12

Sharon purchased a new photocopier for her business.According to her accountant,she can deduct 1/7^th of its original cost each year for the next seven years from her taxable income.This depreciation method is commonly referred to as:

A)declining balance method
B)straight line method
C)sum of the years' digits method
D)modified accelerated cost recovery system

Question 13

The benefit of being classified as a capital gain is that the income is subject to a tax rate that maxes out at 15%,which may be well below the tax rates associated with depreciation recapture income and ordinary income for a particular investor.In order to qualify for the lower capital gain tax rate,the property being sold must be held for more than:

A)1 month
B)3 months
C)6 months
D)12 months

Question 14

Since many commercial properties are held by limited liability corporations or limited partnerships,it is important to understand the tax consequences at the individual investor level.Individuals face different tax rates depending on the level of their taxable income.As of 2012,an individual making between $$85,650 and $178,650 would fall into which of the following tax brackets?

A)15%
B)25%
C)28%
D)35%

Question 15

Certain costs associated with a property's upkeep as well as the manner in which it was financed can be depreciated and therefore have a beneficial impact on the tax paid by the investor in a particular year.Which of the following cash outflows is deductible for income tax purposes in the year in which they are made?

A)Operating expenses
B)Capital expenditures
C)Up-front financing costs
D)Repayment of principal

Question 16

Distinguishing between the four categories of real estate for federal tax purposes can be misleading at times.Which of the following categories includes properties that are held primarily for capital appreciation?

A)Personal residence
B)Dealer property
C)Trade or business property
D)Investment property

Question 17

When cash flows are classified as passive activity income,investors are subject to passive
Activity loss restrictions.These restrictions imply that passive income losses:

A)can be used to offset positive taxable income from other passive activities.
B)can be used to offset positive taxable income from other passive and active activities.
C)can be used to offset positive taxable income from other passive and portfolio activities.
D)cannot be used to offset positive taxable income from any type of activity.

Question 18

The potentially large amount of taxes due on sale of commercial property has caused investors and policy makers to seek ways to defer taxes on the disposition of a property.A popular option has become for investors to swap one eligible property for another in order to avoid or defer capital gains taxes.Which of the following methods for deferring taxes does this describe?

A)Installment sale
B)Fully-taxable sale
C)Like-kind exchange
D)Sale leaseback

Question 19

Suppose a taxpayer owns an apartment complex.Under U.S.tax law,in what category would this property be classified?

A)Personal residence
B)Dealer property
C)Trade or business property
D)Investment property

Question 20

The direct ownership of commercial real estate produces cash flows from rental operations and,perhaps,cash flow from an eventual sale of the property.Since financial leverage and tax considerations play an important part in determining an investor's returns,the measure of investment value most relevant to investors is the present value of:

A)before-tax cash flows (BTCF)
B)after-tax cash flows (ATCF)
C)net operating income (NOI)
D)net sale proceeds (NSP)

Question 21

The use of mortgage debt to finance an income property investment has certain tax consequences.For example,up-front financing costs for investment properties are not fully deductible in the year in which they are paid.Instead,they must be amortized over the life of the loan.If up-front financing costs on a 30-year loan total $6,000,what is the maximum amount per year that the investor can deduct when calculating taxable income from rental operations? (Assume that there is no prepayment on the loan)

A)$100
B)$200
C)$2,400
D)$6,000

Question 22

Homeowners receive preferential tax treatment under current federal income tax laws.The benefits that homeowners receive from this treatment include all of the following EXCEPT:

A)Appreciation in the value of the home that has occurred since the time of purchase is excluded from federal taxable income
B)Homeowners can deduct their mortgage interest expenses on both first (primary)and second homes from federal taxable income
C)Homeowners can deduct local property taxes from federal taxable income
D)Losses on the sale of a personal residence can be deducted from federal taxable income

Question 23

Given the following information,calculate the taxes due on sale for the following fully taxable sale.Net Sale Proceeds: $1,500,000,Adjustable Basis: $830,000,Depreciation Recapture: $150,000,Capital Gain Tax: 15%,Depreciation Recapture tax: 25%.

A)$37,500
B)$78,000
C)$100,500
D)$115,500

Question 24

Given the following information,calculate the straight-line depreciation rate for the first year using the midmonth convention.Cost recovery period: 27 ½ years,Date of purchase: April 10^th.

A)2.6%
B)3.63%
C)19.5%
D)70.8%

Question 25

The tax treatment of up-front financing costs calls for these expenses to be amortized over the life of the loan.However,if the loan is prepaid prior to the term of the loan (perhaps because the property is sold),the tax treatment of these costs changes.If up-front financing costs on a 30-year loan total $6,000,and the loan is prepaid in full at the end of year 5,what is
The maximum amount that the investor can deduct when calculating taxable income from rental operations in year 5?

A)$5,000
B)$5,200
C)$5,600
D)$6,000

Question 26

Accelerated methods of depreciation result in greater depreciation allowances than straight-line depreciation in the early years of the depreciation schedule.Suppose a personal property is eligible for a three-year cost recovery period and can be depreciated using 200 percent declining balance depreciation.Calculate the accelerated depreciation rate in the first year.

A)14.28%
B)28.57%
C)33.33%
D)66.66%

Question 27

Limited liability companies (LLCs)and limited partnerships are preferred to corporate ownership structures because these forms of ownership allow investors to obtain limited liability and avoid the double taxation faced by corporations.This tax benefit can be extremely important as the maximum capital gain rate for corporations remains at (as of 2012):

A)15%
B)25%
C)35%
D)45%

Question 28

The tax treatment of real estate holdings that are classified as trade or business property and are held for more than one year is more commonly referred to as which of the following sections of the tax code?

A)Section 1231
B)Section 1031
C)Section 856
D)Section 851

Question 29

Given the following information,calculate the depreciation allowance for year 1.Depreciable Basis: $200,000,Declining Balance Depreciation: 175%,Cost Recovery Period: 27 years.

A)$3,704
B)$6,481
C)$7,407
D)$12,963