Real Estate Principles Chapter 15 Quiz

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1 Real Estate Principles Chapter 15 Quiz 1. Which of the following personal residence expenses may be claimed as deductions on a federal income tax return? A. Mortgage payments and property taxes B. Mortgage payments, fire insurance, and broker's commission C. Prepayment penalty and broker's commission D. Mortgage interest payments, prepayment penalty, and property taxes 2. Which of the following terms refers to gain taxed in the year it is realized? A. Realized gain B. Recognized gain C. Actual gain D. Deferred gain 3. Which of the following properties could be depreciated for income tax purposes? A. An owner-occupied farmhouse B. An commercial apple orchard C. Vacant land D. Any of the above 4. Depreciation on real property means that: A. the property becomes virtually worthless B. the property's value increases C. the basis decreases D. the basis increases 5. Erin purchases an investment property for $250,000. She eventually sells it for the same amount. During her eight-year period of ownership, she depreciates the property's improvements $50,000. For income tax purposes: A. she has no actual gain B. her gain may be deferred C. she must pay capital gains D. she suffered a capital loss 6. Tom buys a new home and trades his former personal residence to Jerry for a rental property. Tom continues to rent out the property. Jerry uses Tom's old home for rental income as well. Which of the following is true? A. This is a tax-free exchange for Tom B. This is a tax-free exchange for Jerry C. This is a tax-free exchange for both parties D. This is a tax-free exchange for neither party 2006 Rockwell Publishing Company 1

2 7. An apartment complex valued at $125,000 has an outstanding mortgage of $37,000. A duplex worth $149,000 has a first mortgage balance of $18,500 as well as a junior mortgage balance of $12,300. If the two properties are exchanged, how much in cash or other boot will be paid? A. $125,000 $37,000 = $88,000 B. $149,000 $125,000 = $24,000 C. $118,200 $88,000 = $30,200 D. $149,000 $118,200 = $30, A condominium owner living in his condominium is permitted to deduct which of the following expenses on his federal income tax return? A. Repair and upkeep of his individual unit B. Interest paid on a loan secured by the common areas C. Monthly payment toward upkeep of the common areas D. None of the above 9. Which of the following items is something for which a homeowner could adjust his cost basis? A. A new deck B. Mortgage interest C. Homeowner's insurance D. Depreciation 10. If the owner of a rental property decides to add a swimming pool and patio, the costs of these additions are: A. depreciated with the land B. depreciated with the land C. not tax-deductible unless they can be shown to prolong the life of the rental property D. added to the property's cost basis 11. An owner of an apartment complex reports income on a cash basis. Which of the following is not tax-deductible? A. Mortgage interest B. Lost income from vacancies C. Cleaning and maintenance costs D. Improvement and redecorating costs 12. Regarding tax-free exchanges, which of the following is true? A. An office building cannot be exchanged for an apartment complex B. A personal residence may be exchanged for a house of similar worth C. Property exchanged must be used in a trade or business or held for income or investment D. Both properties must carry mortgages 13. An advantage of selling property through an installment sale is that: A. the seller can choose what year to declare the gain from the sale B. the gain is prorated and taxed over the term of the installment contract C. the gain is not taxed until it is fully realized D. no taxes are due the year of the sale 2006 Rockwell Publishing Company 2

3 14. In a tax-free exchange, "boot" could refer to: A. net relief of a mortgage B. an increase in cost basis C. a decrease in cost basis D. an increase in depreciation 15. Which of the following statements about a tax-free exchange is TRUE? A. The properties exchanged must be held for income or investment B. The exchange must be completed upon closing C. Every exchange must include boot to balance the transaction D. The real properties exchanged must have the same value 2006 Rockwell Publishing Company 3

4 Answer Key with Explanations 1. D Explanation: Mortgage interest, a mortgage prepayment penalty, and property taxes are all deductible expenses for a personal residence. Note that only payments of mortgage interest, not mortgage principal, are deductible. 2. B Explanation: Recognized gain is the gain that is taxed in the year of the transaction from which it is realized. 3. B Explanation: As property used in a trade or business, a commercial apple orchard could be depreciated for income tax purposes. 4. C Explanation: Depreciation has the effect of lowering the property's cost basis. 5. C Explanation: Erin's capital gain is the sales price minus her adjusted cost basis. Adjusted cost basis is initial cost basis minus depreciation. So the sales price ($250,000) minus the adjusted cost basis ($200,000) is $50, B Explanation: In a tax-free exchange, both the old and new properties must be held for income or investment or used in a trade or business. Here, both Jerry's former and new properties are rental properties. Tom, however, previously owned a personal residence and thus does not qualify for a tax-free exchange. 7. C Explanation: The apartment complex's equity is $88,000 and the duplex's equity is $118,200. The difference is $30,200 and is the amount that the apartment complex owner will pay to the duplex owner in boot. 8. B Explanation: He may deduct his share of the interest paid on a mortgage of the common areas. Individual unit maintenance and repair costs are not deductible and neither are assessments for upkeep of common areas. 9. A Explanation: As a capital improvement, a new deck would be added in calculating the adjusted cost basis. Note that depreciation is not taken into account when calculating the adjusted basis of a personal residence Rockwell Publishing Company 4

5 10. D Explanation: Capital expenditures are added to the cost basis of the property. 11. B Explanation: Lost income from vacancies is simply not reported as income. The other expenses are tax-deductible. 12. C Explanation: To be eligible for a tax-free exchange, a property must be used in a trade or business or held for income or investment. It must be exchanged for like-kind property. 13. B Explanation: In an installment sale, the seller must pay taxes only on the gain received during each tax year. Thus, the gain is prorated over the course of the installment contract. 14. A Explanation: "Boot" can be cash, property, or other consideration, including mortgage relief. 15. A Explanation: The properties exchanged must be income-producing or investment properties. Personal residences are not eligible for an exchange. Boot is necessary only when the real properties are of unequal value. The exchange must be completed within 180 days after closing Rockwell Publishing Company 5

UNIT 8: BOBRA TAHAN HOWARD HARRIS

NATIONAL INTERACTIVE STUDY GROUP 1 UNIT 8: BOBRA TAHAN HOWARD HARRIS Study Group Information 2 Please refer to your dashboard for the following: Link to calendar of discussion topics Links to discussion