Chp. 31 Quiz - Income Tax Issues

Question 1

What is the formula for determining the amount realized from the sale of a home?

Answer 1

Sale price – costs of sale

Question 2

In a 1031 exchange, what is the period within which a person who has sold the relinquished property must receive the replacement property?

Answer 2

The exchange period

Question 3

An unrealized capital gain is

Answer 3

The amount of profit that would result in the sale of an investment if it were to be sold.

Question 4

The Taxpayer Relief Act allows penalty-free IRA withdrawals for

Answer 4

First time home buyers.

Question 5

What is the class life for residential structures?

Answer 5

27.5 years

Question 6

Section 1031 exchanges are

Answer 6

tax deferred.

Question 7

Lori purchased a home for $250,000 with an additional $5,000 in related purchase costs and then added a garage at a cost of $25,000. She sold the home 10 years later for $575,000 and paid $35,000 in selling costs. She will pay capital gains tax on how much?

Answer 7

$10,000

*$250,000 + $5,000 = $255,000 beginning basis + $25,000 capital improvements = $280,000 adjusted basis; $575,000 selling price – $35,000 selling costs = $540,000 amount realized – $280,000 adjusted basis = $260,000 gain on sale. The capital gains tax exclusion for a single person is $250,000, so Lori will pay capital gains tax on $10,000 ($260,000 gain – $250,000 exclusion = $10,000).

Question 8

Which of the following statements about points is true?

Answer 8

Points paid on a second home can only be deducted over the life of the loan.

Question 9

The tax rate that applies to income is called the

Answer 9

Marginal tax bracket.

Question 10

When was the Taxpayer Relief Act signed into law?

Answer 10

1997

Question 11

A/n ______________ is the financial result of an investment that has been sold at a profit.

Answer 11

realized capital gain

Question 12

The party who receives boot in a tax- free exchange has

Answer 12

a net gain and must pay taxes on the difference.

Question 13

What is the formula for determining the gain on the sale of a home?

Answer 13

Amount realized – adjusted basis = gain on sale.

Question 14

On what properties can the owner take a mortgage interest deduction?

Answer 14

A qualified primary or second home

Question 15

John and Sheryl bought their home for $354,000. They made $129,000 of improvements. They sold the home for $1,085,000 and paid $56,000 in selling expenses, including the broker’s commission. On what amount will they pay capital gains tax?

Answer 15

$46,000

Question 16

What is the maximum net capital loss that can be deducted annually?

Answer 16

$3,000

Question 17

Which of the following properties are not eligible for like-kind exchange under Section 1031?

Answer 17

Properties outside the United States

Question 18

Which provision of the Taxpayer Relief Act of 1997 allowed first time buyers to use IRA funds for a house purchase?

Answer 18

Retirement savings

Question 19

Rob and Lori purchased a home for $350,000 with an additional $5,000 in related purchase costs and then added a garage at a cost of $25,000. They sold the home for $450,000 and paid $28,000 in selling costs. They will pay capital gains tax on how much?

Answer 19

Zero

*$350,000 + $5,000 = $355,000 beginning basis + $25,000 capital improvements = $380,000 adjusted basis; $450,000 selling price – $28,000 selling costs = $422,000 amount realized – $380,000 adjusted basis = $42,000 gain on sale. The capital gains tax exclusion for a married couple filing jointly is $500,000, so Rob and Lori will pay no capital gains tax on this sale because their gain is less than the exclusion.

Question 20

What is a measurement of how much is invested in the property for tax purposes?

Answer 20

Basis

Question 21

What do we call investment funds from investors who do not materially participate in managing the investment?

Answer 21

Passive activity income