Chapter 11 Taxation

Question 1

Explain a sale and leaseback.

Answer 1

A sale and leaseback is when a company sells its plant, warehouse, or office building but continues to occupy the facility and pay rent to the buyer.

Question 2

List some costs that are tax deductible for investment properties.

Answer 2

mortgage interest
property taxes
repairs and maintenance 
insurance
utilities

Question 3

Gain resulting from the forgiveness of debt is sometimes known as:

a. long-term gain
b. phantom gain
c. ordinary gain
d. capital gain

Answer 3

b. phantom gain

Question 4

Under the current tax law, depreciation is calculated on an office building using the straight line method over:

a. 15 years
b. 19 years
c. 272 years
d. 39 years

Answer 4

d. 39 years

Question 5

How is the adjusted basis arrived at?

Answer 5

purchase price plus capital improvements less depreciation and tax credits.

Question 6

What requirements must be met for a tax credit on low-income housing?

Answer 6

low income tenant occupancy
gross rent restrictions
state credit authority
IRS certification

Question 7

What are tax credits? Give some examples of them.

Answer 7

Tax credits are costs that are applied directly against the tax liability. Some examples include rehabilitation, investment, certified historic structure, low-income housing, energy investment, disabled access, and employer-provided services.

Question 8

The expenditure that can be capitalized is a:

a. roof repair
b. parking lot resealing
c. HVAC maintenance contract
d. cooling tower replacement

Answer 8

d. cooling tower replacement

Question 9

What is phantom gain?

Answer 9

Phantom gain results from the forgiveness of debt.

Question 10

What is the basic formula used to calculate taxes?

Answer 10

[(gross income-tax deductions)x tax rate]-tax credits

Question 11

How is a capital gain calculated?

Answer 11

sales prices minus the adjusted basis

Question 12

What is a net capital gain?

Answer 12

It is the sale price minus the adjusted basis.

Question 13

Define the term tax-deferred exchange.

Answer 13

A transaction in which property is exchanged and the resulting gain is not taxed.

When you sell a house and use the proceeds to purchase a different house.

Question 14

Which provides an annual tax credit?

a. rehabilitation credits
b. certified historic structures
c. low-income housing credits
d. investment tax credits

Answer 14

c. low-income housing credits

Question 15

According to tax laws, when must an improvement expenditure be capitalized and depreciated?

Answer 15

It must be capitalized if the improvements add value to a property and will last more than 12 months.

Question 16

Which cost of home ownership is an allowable tax deduction?

a. major home repairs
b. insurance
c. real property taxes
d. utilities

Answer 16

c. real property taxes

Question 17

What are common tax deductions allowed for investment property?

Answer 17

mortgage interest
property taxes
repairs and maintenance 
insurance
utilities
depreciation

Question 18

What is the adjusted basis on investment property that was bought for $100,000, had improvements of $20,000 and depreciation of $40,000.

Answer 18

purchase price plus capital improvements less depreciation and tax credits.

$80,000