Question 1

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?

Accepted Answer

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

Question 2

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:

Accepted Answer

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

Question 3

Given the following information, calculate the straight-line depreciation rate for the second year. Cost recovery period: 27 ½ years, Date of purchase: June 12ᵗʰ.

Accepted Answer

A)   1.67%
B)   1.97%
C)   3.63%
D)   20.0% C

Question 4

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

Accepted Answer

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

Question 5

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?

Accepted Answer

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 6

The benefit of being classified as a capital gain is that the income is subject to a tax rate that maxes out at 20%, 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:

Accepted Answer

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

Question 7

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%.

Accepted Answer

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

Question 8

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 2016):

Accepted Answer

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

Question 9

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:

Accepted Answer

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 10

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

Accepted Answer

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 11

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:

Accepted Answer

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

Question 12

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?

Accepted Answer

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 13

Suppose that you are able to generate an annual depreciation deduction of $20,000 that would otherwise have been taxed at a 30% rate each year for 7 years. Suppose that your taxes due on sale in year 7 will be $32,000 greater than if the property had not been depreciated. Determine the net benefit of depreciation assuming a discount rate of 6.5%.

Accepted Answer

A)   $12,315
B)   $20,592
C)   $32,907
D)   $53,499

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 2016, an individual making between $91,151 and $190,150 would fall into which of the following tax brackets?

Accepted Answer

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

Question 15

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?

Accepted Answer

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

Question 16

Given the following information, determine the unrecovered depreciable basis: Depreciable Basis: $300,000, Declining Balance Depreciation: 200%, Cost Recovery Period: 7 years.

Accepted Answer

A)   $42,857
B)   $85,714
C)   $214,286
D)   $257,143

Question 17

Tax depreciation shelters a portion of annual operating income from taxation. However, the amount of cumulative tax depreciation is taxed when the property is sold. Suppose that your taxes due on sale will be $35,000 greater than if the property had not been depreciated. If the sale were to occur 5 years from now, determine the present value of the tax on depreciation recapture in the year of sale assuming a discount rate of 9.5%.

Accepted Answer

A)   $22,233
B)   $31,963
C)   $55,098
D)   $134,390

Question 18

Given the following information, calculate the accelerated rate of depreciation that can be applied to the unrecovered basis. Depreciable Basis: $100,000, Declining Balance Depreciation: 150%, Cost Recovery Period: 15 years.

Accepted Answer

A)   3.63%
B)   5.56%
C)   6.67%
D)   10.0%

Question 19

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 10ᵗʰ.

Accepted Answer

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

Question 20

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

Accepted Answer

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

Exam 20: Income Taxation and Value