3-1 Identify the type of property in a situation.

Question 1

Types of Property

Initially, a financial planner is required to classify a property, based on its characteristics, into one of two major groups: _____ or _____.

(3-1, pg 9)

Answer 1

realty or personalty

Once this determination is made, both realty and personalty can be broken down into tangible and intangible property property.

Question 2

Examples of Property Classifications

Building

a. Realty, Tangible
b. Realty, Intangible
c. Personalty, Tangible
d. Personalty, Intangible

(3-1, pg 9)

Answer 2

Realty, Tangible

Question 3

Examples of Property Classifications

Automobile

a. Realty, Tangible
b. Realty, Intangible
c. Personalty, Tangible
d. Personalty, Intangible

(3-1, pg 9)

Answer 3

Personalty, Tangible

Question 4

Examples of Property Classifications

Leasehold interest in real estate

a. Realty, Tangible
b. Realty, Intangible
c. Personalty, Tangible
d. Personalty, Intangible

(3-1, pg 9)

Answer 4

Realty, Intangible

Question 5

Examples of Property Classifications

Stock certificate, promissory note, patent

a. Realty, Tangible
b. Realty, Intangible
c. Personalty, Tangible
d. Personalty, Intangible

(3-1, pg 9)

Answer 5

Personalty, Intangible

Question 6

Realty vs. Personalty

_____, is comprised of land, anything that is permanently affixed or attached to the land, or certain items that cannot easily be removed. Common examples include vacant lots, buildings, surfaced parking lots, sidewalks, fences, wall partitions, and billboards.

(3-1, pg 9)

Answer 6

Realty, real property, or real estate as it is more commonly known

Question 7

Realty vs. Personalty

_____ is defined as any type of property that is not realty; it includes such items as automobiles, airplanes, clothing, equipment, and furniture.

(3-1, pg 9)

Answer 7

Personalty, also known as personal property

Question 8

Tangible vs. Intangible Property

_____ is property that has some sort of physical existence and can be felt or touched. Examples would be a building (realty) or an automobile (personalty).

(3-1, pg 10)

Answer 8

Tangible property

Both realty and personalty can be broken down further into tangible and intangible property.

Question 9

Tangible vs. Intangible Property

_____, has no physical existence of its own and merely represents the evidence of ownership or value. It is a type of property that cannot be felt or touched. Examples would be a leasehold interest in real estate (realty) or stock certificates, promissory notes, and patents (personalty).

(3-1, pg 10)

Answer 9

Intangible Property

Both realty and personalty can be broken down further into tangible and intangible property.

Question 10

Types of Property

Once the property is classified by its characteristics, its use should be determined. This classification of property also has two major groups into which the property can be placed. The financial planner must determine whether the property is _____ property or _____ property.

(3-1, pg 10)

Answer 10

income-producing or personal use

Income-producing property can be further subdivided into property used in a trade or business, property held for the production of income, or inventory.

Question 11

Types of Property

_____ is the type of property used to produce income on a regular and continuous basis in the taxpayer’s trade, business, or occupation. An example of this type of property would be a glass display case used by the proprietor of a jewelry store. A jewelry display case is a necessary aspect of the jeweler’s doing business and is used on a regular and continuous basis in an income-producing activity.

a. Property used in a trade or business
b. Property held for the production of income

(3-1, pg 11)

Answer 11

Property used in a trade or business

Question 12

Types of Property

_____ is the type of property that does not require a significant amount of the taxpayer’s time or attention but still is used to produce income. It is property held to realize income from current operations (as with rental property) or from ultimate sale (as with stock).

a. Property used in a trade or business
b. Property held for the production of income

(3-1, pg 11)

Answer 12

Property held for the production of income

An example of this type of property would be a small apartment building held for investment purposes by the owner of the jewelry store. An investment in a small apartment building would be an activity engaged in for the production of income. Further, although managing the apartment building would require some time on the part of the taxpayer, it would not require a disproportionate amount of time when compared to running the jewelry store.

Question 13

Types of Property

_____ activities may fall into either category of Property used in a trade or business or Property held for the production of income

(3-1, pg 11)

Answer 13

Rental

For example, an automobile rental business owns numerous automobiles. These automobiles are properties used in a trade or business. Similarly, a hotel or motel uses the real estate, the hotel, as trade or business property. An individual who owns a single residential rental property likely owns property held for the production of income.

Question 14

Types of Property

_____ is the last of the income-producing types of property and is defined as property that is held out for resale in the normal course of a trade or business. It differs from the other two types of income-producing property in that no depreciation or cost recovery deductions are allowed.

(3-1, pg 12)

Answer 14

Inventory

An example of inventory would be jewelry held out for sale to the public by the owner of the jewelry store.

Question 15

Types of Property

_____, not to be confused with personal property (personalty), is property that is held for the taxpayer’s personal pleasure or enjoyment.

(3-1, pg 12)

Answer 15

Personal use property

An example of personal use property would be a sailboat purchased purely for pleasure purposes.

Question 16

Types of Property

1. A leasehold interest in an apartment building is considered
2. tangible realty.
3. tangible personalty.
4. intangible realty.
5. intangible personalty.

(LO 3-1)

Answer 16

3. intangible realty.

A leasehold interest is considered intangible; an interest in real estate is considered realty.

Question 17

Types of Property

A taxpayer holds a lease on property that she uses as a warehouse for her manufacturing business. The interest would be classified as

1. property held for the production of income.
2. property used in a trade or business.
3. personal-use property.

(LO 3-1)

Answer 17

2. property used in a trade or business.

The building is used in a trade or business.

Question 18

Types of Property

Sam Jones is a well-established attorney in a large law firm. He uses a personal computer at home exclusively to keep track of his investment portfolio.

Is anything depreciable? How so?

(LO 3-1, 62)

Answer 18

The cost of the computer would be depreciable over five years. The depreciation deductions would be ‘production of income’ expenses on Schedule A, and would be considered Tier-II miscellaneous itemized deductions.