Chap 23 Income Tax Issues in Real Estate

Question 1

Which is allowed under the Internal Revenue Service (IRS) code? a. deducting credit card interest b. deducting a loss on the sale of a primary residence c. deducting mortgage interest d. reducing income by the amount paid to rehabilitate a home.

Answer 1

c. deducting mortgage interest

Question 2

Mary is a single taxpayer. She paid $175,000 for her home, which she has lived in for four years. She plans to sell the home this year. A buyer offered Mary $275,000What amount of gain may be EXCLUDED from her income?

a. $0
b. $100,000
c. $250,000
d. $ 500,000

Answer 2

b. $100,000

A single person can exclude up to $250,000; a married couple filing jointly can exclude up to $500,000

Question 3

Clare and Lois bought their home in 2001 for $300,000. In 2012, they sold it for $500,000. On what amount will they owe capital gains?

a. $0
b. $200,000
c. $300,000
d. $500,000

Answer 3

a. $0

a married couple filing jointly can exclude up to $500,000,A single person can exclude up to $250,000;

Question 4

Which is considered a type of active income?

a. capital gains
b. dividends
c. interest
d. wages

Answer 4

d. wages

• active income is income received from services performed and includes earnings from any of the following sources;*
  1. Wages, salaries, commissions, bonuses and other payments for services rendered.
  2. Profit from a trade or business in which the taxpayer is an active participant
  3. Gain on the sale or disposition of assets used in an active trade or business I
  4. Income from intangible property if the taxpayer played a significant role in the creation of the property.

Question 5

A (n) ______________ can be used in a like-kind exchange:

a. Boeing 737 and tractor-trailer
b. delivery truck and a single office
c. office building and an apartment building
d. recreational vehicle and a stamping machine.

Answer 5

c. office building and an apartment building

Like-kind Exchanges Section 1031 allows a taxpayer to sell an investment property and purchase another investment property in its place without paying taxes on the proceeds of the sale. The transaction must be an exchange and not a sale (actual property must be exchanged not soley for cash.

Question 6

Which is an incentive to owning your own home?

a. always deduction points in the year of closing
b. deducting expenses related to construction immediately
c. using the home’s equity to fund an offshore tax shelter
d. using up to $10,000 from a retirement fund tax free to purchase a home.

Answer 6

d. using up to $10,000 from a retirement fund tax free to purchase a home.

Tax Benefits of Home Ownership -Paid property taxes are deductible -Interest paid on a mortgage is deductible -Interest paid on home equity loans used to improve property is deductible -Individual Retirement Account (IRA) funds can be tapped to help purchase a first home (up to $10,000)

Question 7

The recovery of the cost of a capital asset over time by expensing a set portion of it each year is called

a. appreciation
b. capital decline
c. depreciation
d. negative cash flow.

Answer 7

c. depreciation

Question 8

Jack and Katherine purchased a home in 1993 for $800,000 when they got married. They sold the property in 2008 for $1.5 million. ON what amount did they have to pay capital gains taxes on their joint return?

a. $0
b. $200,000
c. $500,000
d. $700,000

Answer 8

b. $200,000

$1,500,000 - 800,000

_________________

$700,000

-500,000

_______________

$200,000

a married couple filing jointly can exclude up to $500,000,