Ch 13 Quizzes

Question 1

In most cases, a taxpayer’s _______________ is equal to the actual amount of his investment–that is, how much it cost to acquire the property.

Answer 1

Initial basis

Question 2

A taxpayer who is entitled to a/an _______________ can subtract a specified amount from her income before it is taxed.

Answer 2

Deduction

Question 3

A gain on the sale of an asset held for personal use or as an investment is considered a/an _______________.

Answer 3

Capital gain

Question 4

A/an _______________ increases the value of the property or significantly extends its useful life.

Answer 4

Capital expenditure

Question 5

Capital expenditures are added to the initial cost of acquiring the property in calculating the _______________.

Answer 5

Adjusted basis

Question 6

The taxpayer’s income is added up, the tax rate is applied, and then any applicable _______________ is subtracted to determine how much the taxpayer will actually have to pay.

Answer 6

Tax credit

Question 7

A gain is not considered taxable income until it is _______________.

Answer 7

Realized

Question 8

A maintenance expense, such as repainting or replacing a broken window, is not a/an _______________.

Answer 8

Capital expenditure

Question 9

The _______________ is the tax rate that will be applied to the last taxable dollar that a person earns.

Answer 9

Marginal tax rate

Question 10

T/F: If a developer exchanges one of the new homes in his subdivision for a similar home in another part of town, he is eligible for the tax advantages of a tax-free (tax-deferred) exchange.

Answer 10

False

A developer is a dealer, and the homes in his subdivision are considered inventory. Dealer-held property is not eligible for a tax-free exchange.

Question 11

T/F: In installment sales, the gross profit is used in calculating the gain to be recognized in any given year.

Answer 11

True

To determine the gross profit, take the seller’s basis at the time of sale, add the commission and other selling expenses, and subtract this sum (the adjusted basis) from the sales price.

Question 12

T/F: Installment sale reporting is permitted for all classes of property, except for dealer property (which is eligible only under special conditions).

Answer 12

True

Dealer property is inventory, and the full profit is recognized in the year of the sale. All other types of property are eligible for installment sale reporting.

Question 13

T/F: Jones sold his property for $150,000, which amounted to a gross profit of $24,000. His gross profit ratio is 12%.

Answer 13

False

You determine the gross profit ratio by dividing the gross profit by the sales price. $24,000 divided by $150,000 equals 16%. The gross profit percentage is 16%.

Question 14

T/F: In a tax-free exchange of two rental properties, one taxpayer traded away a property with a higher mortgage balance than the one he received. This advantage is called debt relief, which is boot and taxable in the year of the exchange.

Answer 14

True

Since properties involved in an exchange are not likely to have identical mortgage balances, the mortgage debt relief is a standard part of tax-free exchanges. It is considered boot and taxable in the year of the exchange.

Question 15

T/F: In an installment sale, the gross profit ratio applies to all principal and interest payments received in a given calendar year.

Answer 15

False

The gross profit ratio applies only to principal payments received. Interest payments received are taxable as ordinary income in the year they are received.

Question 16

T/F: To qualify for a tax-free exchange, the property must be unimproved investment property, income property, personal use property, or property used in a trade or business.

Answer 16

False

Personal use property, such as a principal residence or a second home, is not eligible for a tax-free exchange.

Question 17

T/F: An investor owns a property free and clear. It is valued at $420,000 with a book value of $320,000. He exchanges the property for another property, owned free and clear, valued at $435,000. He receives no boot. The book value of his new property would be $335,000.

Answer 17

False

“Book value” is the same thing as initial basis. If no boot is exchanged, the old property’s book value is transferred to the new property. So in this case, the book value of the new property would be $320,000.

Question 18

T/F: If an owner receives money because a property has been destroyed or condemned, it is known as involuntary conversion.

Answer 18

True

Involuntary conversion occurs when an owner receives reimbursement for destroyed, stolen, or condemned property, usually from an insurer or from the government. In effect, the property is “converted” to cash.

Question 19

T/F: A taxpayer filing an individual return can exclude up to $500,000 of profit from the sale of his personal residence.

Answer 19

False

A taxpayer filing an individual return can exclude up to $250,000 of profit; taxpayers filing a joint return can exclude up to $500,000 of profit.

Question 20

T/F: To qualify for the exclusion of profit from the sale of a personal residence, a taxpayer must have owned and lived in the home for at least two of the last five years.

Answer 20

True

Because of this requirement, this exclusion may be used only once every two years.

Question 21

T/F: A property owner may deduct the annual ad valorem taxes on her property from her taxable income.

Answer 21

True

Mortgage interest and property tax deductions are attractive incentives for real estate ownership. Limits apply.

Question 22

T/F: Repair expenses incurred by a homeowner are fully deductible in the year of the repairs.

Answer 22

False

Deductions for repair expenses may be taken for most real estate, but not for principal residences and personal use property.

Question 23

T/F: The cost of improvements on investment properties can be depreciated.

Answer 23

True

Buildings wear out, so investment property owners can make annual depreciation claims on the improvements over a specified number of years. Remember that the land on which the improvements rest cannot be depreciated.

Question 24

T/F: Depreciation claims are deducted from a taxpayer’s initial basis to arrive at the adjusted basis.

Answer 24

True

If a taxpayer’s initial basis is $250,000 and she has $30,000 in depreciation claims, her adjusted basis will be $220,000. The adjustments will result in a higher taxable profit when she sells the property.

Question 25

T/F: A condominium owner may deduct interest he pays on his share of a mortgage for the common areas.

Answer 25

True

While routine maintenance and upkeep costs for condominium common areas are not deductible, if there is a mortgage against a condominium common area, then a unit owner may deduct his portion of the interest for that mortgage.