Taxation and federal income tax laws

Question 1

Most home sales are exempt from capital gains. What are the three qualifications so that a homeowner can claim this exemption?

Answer 1

• The home must be the primary residence.
• The home must have been lived in two of the last five years before the sale.
• The sellers could not have sold more than one home in the past 24 months.

Question 2

Business taxes are based on the Net Income that is derived after deductions for what three items?

Answer 2

Operating Expenses, Collection Losses and Depreciation.

Question 3

To deduct depreciation from a business’ taxes, the asset must meet what four requirements?

Answer 3

The asset:
• Be property owned by the business
• Be used in the business
• Have a determinable useful life
• Be expected to last for more than one year

Question 4

What are the three main categories of business income?:

Answer 4

Active Income
Passive income:
Portfolio Income:

Question 5

What is Active Income?

Answer 5

Active Income is Income for which the taxpayer performs services

Question 6

What is passive income?

Answer 6

Passive income is income that the taxpayer does not earn from salaries, tips, etc., but as a partner in a rental property

Question 7

What is portfolio income?

Answer 7

Portfolio Income is income received from dividends, royalties, capital gains, etc.

Question 8

The steps in the Income Capitalization Approach are:

Answer 8

1. Estimate Annual Gross Income
2. Subtract allowance for Vacancy and Collection Loss
3. Deduct Operating Expenses
   4 . Divide the Capitalization Rate (Cap Rate) into the Net Operating Income (NOI)