Question 1

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)

Accepted Answer

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

Question 2

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 D

Question 3

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:

Accepted Answer

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

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?

Accepted Answer

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

Question 5

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?

Accepted Answer

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

Question 6

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?

Accepted Answer

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

Question 7

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?

Accepted Answer

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

Question 8

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.

Accepted Answer

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

Question 9

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 10

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?

Accepted Answer

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

Question 11

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?

Accepted Answer

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

Question 12

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:

Accepted Answer

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

Question 13

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

Accepted Answer

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

Question 14

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

Question 15

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 16

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:

Accepted Answer

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

Question 17

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 18

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 19

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

Question 20

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?

Accepted Answer

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

Exam 20: Income Taxation and Value

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:

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:

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?

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?

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?

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

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:

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

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:

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:

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

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.

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?