Review 05: Ancillary Concepts (17-20)

Question 1

Violations of federal and state fair housing laws can result in which of the following?
A. All of the above
B. NCREC disciplinary action
C. Imprisonment
D. A fine

Answer 1

A. All of the above
(The violation of fair housing laws is both a civil and a criminal violation. Penalties can include fines, imprisonment and disciplinary action by the NCREC including suspension or revocation of the real estate license)

Question 2

How long does a consumer have to file a fair housing complaint under federal law?
A. 90 days
B. 80 days
C. 1 year
D. 2 years

Answer 2

C. 1 year
(Fair housing complaints are filed with HUD or HUD approved local enforcement agencies. The complaint must be filed within 1 year of the time of the alleged violation)

Question 3

A residential property built in 1950 is currently on the market for sale. The owner is required to give which of the following to a potential purchaser?
A. All of the applicable zoning regulations.
B. Lead based paint disclosure.
C. EPA report.
D. Water potability test results.

Answer 3

B. Lead based paint disclosure.
(The lead based paint disclosure is mandatory under federal law. The borrower gets the disclosure, the lead based paint pamphlet and any reports that may be in the possession of the seller regarding lead based paint)

Question 4

An individual sold their primary residence after owning and occupying the home for a minimum of two years out of the last five. They used the proceeds of the sale to purchase an investment property. Which of the following statements is correct?
A. In order to avoid paying income tax on the gain from the sale of residence the owner should consider a 1031 tax deferred exchange since they are purchasing an investment property
B. All of the gain that is realized on the sale of the home will be rolled forward and not be taxed until the eventual sale of the investment property
C. The gain on the home will not be taxed unless it exceeds $250,000 if the individual is single or $500,000 if they are married.
D. The individual will be taxed on the entire gain from the home regardless of how they reinvest the proceeds from the sale.

Answer 4

C. The gain on the home will not be taxed unless it exceeds $250,000 if the individual is single or $500,000 if they are married.
(When a property has been utilized as a primary residence for 2 out of the last 5 years, the gain is not taxed unless it exceeds $250,000 if the individual is single or $500,000 if they are married. A 1031 tax deferred exchange is not permitted on a primary residence, neither at the time of acquisition nor the time of sale)

Question 5

Bob Jones, an elderly white businessman, owns a four-plex apartment building. He lives in one of the units and uses it as his primary residence. He personally manages all matters pertaining to the rental of the apartments and does not use a real estate firm to manage the property. He openly refuses to rent to an individual based on their race. Bob Jones is in violation of:
A. The 1968 Fair Housing Act
B. The 1866 Civil Rights Act
C. The NC Fair Housing Act
D. All of the above

Answer 5

B. The 1866 Civil Rights Act
(The 1866 Civil Rights Act prohibits discrimination based on race or color. There are no exemptions for discrimination based on race or color. While there are exemptions for rental units in a 1-4 unit building under both the NC Fair Housing Act and the 1968 Fair Housing Act, those exemptions do not apply to issues of race or color, which has been illegal since 1866)

Question 6

The Americans with Disabilities Act (ADA) requires which of the following?
A. Landlords of 1-4 unit residential property may not discriminate on the basis of a disability
B. A residential tenant with a handicap has the right to modify their unit, but can be required to restore the modifications at the end of the tenancy
C. Commercial and public buildings must have accessibility for those with a handicap or disability
D. A tenant of a duplex may have an assistive animal if a medical professional has indicated that the animal is necessary due to a disability

Answer 6

C. Commercial and public buildings must have accessibility for those with a handicap or disability
(ADA applies to commercial and public buildings. All of the other answers are required, however, they are required on residential property by the Fair Housing Act, not because of ADA)

Question 7

All of the following are protected classes under the 1968 Fair Housing Act and it’s 1988 Amendments, EXCEPT:
A. A couple or an individual who has a 17-year-old son living with them.
B. pregnant women
C. a couple from China
D. a 68-year-old individual

Answer 7

D. a 68-year-old individual
(Age is not a protected class under the federal Fair Housing Act, therefore based on the information given, there is nothing to indicate that this individual is within a protected class)

Question 8

Several friends got together to form a business entity. Many of them have invested some money, but have no liability for the actions of the business beyond the amount of their investment. This type of business arrangement would be best classified as a:
A. sole proprietorship
B. a limited liability corporation
C. a limited liability partnership
D. a joint venture arrangement

Answer 8

C. a limited liability partnership
(There are two types of partnerships. A general partnership where each partner is liable for all of the actions of the partnership as well as the actions of the other general partners. In a limited partnership or a limited liability partnership the limited partners are liable only to the extent of their investment)

Question 9

Which of the following would NOT require a professional license in order to conduct business?
A. a property manager who is managing the property of another
B. a mortgage broker or mortgage banker
C. an appraiser
D. a professional home stager

Answer 9

D. a professional home stager
(A professional home stager is not a licensed individual)

Question 10

In order to be entitled to the owner occupied residence tax exclusion from capital gains, how long must homeowners reside in their primary residence?
A. Two out of the last three years.
B. Two out of the last five years.
C. Three out of the last five years.
D. One out of the last three years.

Answer 10

B. Two out of the last five years.
(The capital gains tax exclusion for the sale of a primary residence requires that the homeowner lived in the property for at least two years out of the last five years prior to sale. The homeowner may realize a tax free gain of up to $250,000 if single and $500,000 for married couples. The amounts are on the gain of the sale, not the sales price)

Question 11

A property manager operates an apartment complex with a “no pets” policy. A blind lady with a seeing eye dog wants to rent a unit. Which of the following is correct?
A. So long as the property manager has been uniformly enforcing the “no pets” policy they do not have to make the unit available to this prospective tenant.
B. The property manager must rent to the tenant, but may charge a reasonable pet deposit for any damage that might likely be caused by the animal.
C. The property manager must rent the unit and may not charge an additional deposit for the animal.
D. The property manager must follow the instructions of the property owner as to whether or not to allow the animal.

Answer 11

C. The property manager must rent the unit and may not charge an additional deposit for the animal.
(No deposits can be charged for assistive animals that are necessary due to a disability or handicap. The tenant may be required to provide a letter from a medical professional that the animal is necessary for a disability. The property manager must rent the unit)

Question 12

An investor is interested in purchasing an apartment building. The potential gross income for the building is $200,000 per year. Vacancy and collection losses total $50,000 per year. Management fees and operating expenses total $40,000 per year and the debt service to the lender is $80,000 per year. If the investor desires a 20% capitalization rate, what is the maximum amount that they should pay for the building?
A. $550,000
B. $1,000,000
C. $750,000
D. $55,000

Answer 12

A. $550,000
(The NOI (net operating income) is determined by starting with the potential gross income of $200,000 minus the credit and collection losses of $50,000 to determine effective gross income of $150,000. From the $150,000 effective gross income, subtract the operating expenses of $40,000 (the debt service is not included as part of the operating expenses. The NOI is $110,000 divided by the cap rate of 20% = a value of $550,000)

Question 13

Which of the following would NOT be considered a violation of both federal and state fair housing laws?
A. Telling a prospective tenant that a property is not available for rent, when the property is still available.
B. Refusing to work with an Asian couple who does not qualify for a loan.
C. Instructing a buyer that they may not want to live in a certain area.
D. Charging a higher rate for families with small children to compensate the owner for damages likely to be caused by the children.

Answer 13

B. Refusing to work with an Asian couple who does not qualify for a loan.
(Inability to qualify for a loan whether based on insufficient income or poor credit is not a protected class and therefore, no violation would exist in this example)

Question 14

The income capitalization approach would most likely be used in determining the value of which of the following properties?
A. The valuation of raw land
B. The valuation of a newly constructed home
C. The valuation of an apartment building
D. The valuation of a church

Answer 14

C. The valuation of an apartment building
(The apartment building is an income producing property and would most likely be valued using the capitalization approach)

Question 15

When a borrower obtains a loan on a property, federal law requires that the borrower obtain a flood certification. All of the following are true about flood certifications, EXCEPT:
A. if the property is located in a flood zone delineated on the flood certification the borrower must obtain flood insurance.
B. the entity which issues flood certifications is FEMA, the Federal Emergency Management Agency.
C. the FEMA flood maps are created by the Army Corp of Engineers.
D. the borrower may not purchase the property if it is located in a flood zone.

Answer 15

D. the borrower may not purchase the property if it is located in a flood zone.
(Flood certifications must be obtained from FEMA by the lender prior to placing a loan on a property. The FEMA flood maps are created by the Army Corp of Engineers and if the property is located in a FEMA flood zone the borrower must acquire flood insurance. They may still buy the property but they either must have the insurance or pay cash and not obtain a loan)

Question 16

What is a homeowner’s adjusted basis given the following? The property was purchased at a price of $350,000 with a loan of $245,000. The owner did exterior painting at a cost of $5,000, added a sunroom at a cost of $25,000, installed a new roof of $4,000 and paid closing costs at the time of purchase in the amount of $4,500.
A. $379,500
B. $21,500
C. $350,000
D. $376,500

Answer 16

A. $379,500
(Adjusted basis is determined by the sales price + allowable closing costs + capital improvements. $350,000 purchase price + closing costs of $4,500 = $354,500 + $25,000 for the sunroom addition = $379,500. The amount of the loan is irrelevant. Maintenance costs such as roof and painting repairs are not capital improvements)

Question 17

The Quinn’s purchased a home to use as an owner-occupied residence for $295,000. They received a 90% mortgage and paid $5,310 in annual mortgage interest. In their first year of ownership they also paid $4,500 in real estate taxes. They spent $5,000 on new tiling and made capital improvements by adding a deck for $10,000 and installing a $20,000 pool. They also repainted the home for $2,000. What amount are the Quinn’s entitled to as a tax deduction on this property?
A. $4,500
B. $14,810
C. $9,810
D. $39,810

Answer 17

C. $9,810
(On an owner occupied residence a tax deduction is permitted for mortgage interest and real estate taxes. $5,310 + $4,500 = $9,810. The owners do not get a tax deduction for capital improvements or repairs)

Question 18

An investor is selling a commercial property which is free and clear for a price of $750,000. The investor is planning on doing a 1031 tax deferred exchange and acquiring another investment property. The investor decides to reinvest $700,000, but to keep $50,000 of the proceeds for other purposes. Which of the following statements is true?
A. The investor may not keep any of the proceeds and must reinvest the entire amount that he realizes from the sale.
B. If the investor keeps any funds from the sale the entire amount of $750,000 may become taxable as a capital gain.
C. The investor must still invest the $50,000 into real estate.
D. The investor may keep all or any portion of the funds. The portion the investor keeps and does not reinvest will be called “boot” and is taxable.

Answer 18

D. The investor may keep all or any portion of the funds. The portion the investor keeps and does not reinvest will be called “boot” and is taxable.
(“Boot” is the amount of proceeds which an investor does not reinvest in the replacement property. An investor may keep any portion they desire, but the portion kept will be taxed as a capital gain)

Question 19

An investor is interested in purchasing a building for $345,000. The net operating income of the building is $45,000. What is the capitalization rate on the building?
A. 13%
B. 76%
C. 1.3%
D. 130%

Answer 19

A. 13%
(A capitalization rate is determined by taking the NOI (net operating income) and dividing it by the building’s value. $45,000 divided by $345,000 = 13%)

Question 20

All of the following are exemptions under federal fair housing law, EXCEPT:
A. an owner who is renting property when they own less than three properties and do not use the services of a licensed property manager
B. a religious organization who owns property and refuses to rent units to members of another faith or religion
C. a landlord who is renting out one unit of a duplex while occupying the other unit
D. an elderly woman renting a single room in her own private home

Answer 20

A. an owner who is renting property when they own less than three properties and do not use the services of a licensed property manager
(A landlord is subject to fair housing law, regardless of the number of units they own and whether they use the services of a licensee or not. They are only exempt when renting out units in properties which they occupy (1-4 unit properties))

Question 21

A prospective tenant visits a property management company. The tenant is an elderly male, age 80, with hearing and mobility issues. He requests to only be shown units in buildings that are not near or that contain children, because he is afraid that the children will knock him down and he does not want to hurt a child or himself. In this case, what should the property manager do?
A. Comply with his wishes due to the Americans with Disabilities Act.
B. Comply with his wishes because due to his age he is in a protected class.
C. Show him those units for “adults only” because that is in the best interests of everyone’s safety.
D. Not follow his instructions and explain to him the protected class of familial status.

Answer 21

D. Not follow his instructions and explain to him the protected class of familial status.
(The tenant’s request is an illegal one. Families with children are protected under the class of familial status)

Question 22

The following are all correct statements under the Housing for Older Persons Act (HOPA), EXCEPT:
A. the complex or development may require that all residents of the home are 62 or older and those tenants occupy 100% of the units or that 80% of the units are occupied by at least one resident over the age of 55.
B. HOPA added the protected class of age to fair housing
C. the complex or development must verify the ages of residents and must advertise as an age restricted community
D. HOPA permits a properly created retirement community to be exempt from familial status and discriminate against families with children under the age of 18

Answer 22

B. HOPA added the protected class of age to fair housing
(Age is not a protected class within fair housing laws. HOPA did not create the protected class of age, but did allow certain areas if they met requirements to exclude children from living there)

Question 23

Real estate licensees as well as firms may choose many types of business entities. Which of the following forms of business ownership would not require the licensee to obtain a firm license in North Carolina?
A. a sole proprietorship
B. a subchapter S corporation
C. a partnership
D. a limited liability corporation

Answer 23

A. a sole proprietorship
(A sole proprietorship is a way of doing business that does not involve the creation of a formal business entity. There is no liability protection or tax advantages to having a sole proprietorship. Since it is not an entity it is a form of business ownership in North Carolina that does not require a firm license)

Question 24

Directing sellers to move out of a neighborhood due to declining values caused by the racial, ethnic or religious background of residents is a fair housing violation that is most properly classified as:
A. familial status
B. blockbusting
C. redlining
D. steering

Answer 24

B. blockbusting
(Forcing or encouraging sellers to sell due to ethnic or racial changes is blockbusting. It is sometimes called “panic peddling.” When buyers are directed to or away from certain areas that would most likely be classified as steering)

Question 25

In North Carolina which of the following is correct? 1. Statewide building codes set minimum standards for construction 2. A certificate of occupancy must be issued before a structure can be occupied 3. Unpermitted construction or remodeling is a material fact and must be disclosed by licensees
A. 1 and 2
B. 2 and 3
C. 1 and 3
D. 1, 2 and 3

Answer 25

D. 1, 2 and 3
(All three of these statements is true. In NC, building codes exist at the state level and are enforced at the local or municipal level. Certificates of Occupancy also knows as (C of O) are issued by local permit departments to verify that all construction is properly done and unpermitted areas are a material fact. They affect square footage, value, safety and insurability)

Question 26

R-Value indicates the level of heat resistance. It is usually attached and associated most closely with insulation qualities of homes. Which of the following is correct?
A. The lower the R value the more economical the home will likely be to own
B. The higher the R value the more economical the home will likely be to own
C. Real estate professionals are expected to research and disclose R values
D. The R value refers to a reduction in the materials used to construct the home

Answer 26

B. The higher the R value the more economical the home will likely be to own
(Many factors will affect the economical ownership of a home, but the higher the R value, the higher the home’s resistance to heat transfer and homes with a high R value of insulation will likely result in lower utility bills for the owner)

Question 27

All of the following are part of a home’s wall framing, EXCEPT:
A. studs
B. girders
C. sole plate
D. headers

Answer 27

B. girders
(Girders rest on top of piers and support the floor joists between the sills. They are part of the floor framing, not the wall framing)