Unit 9: Rental and Royalty Income

Question 1

Amounts received as rent must be included in:

Answer 1

gross income

Question 2

Rental and royalty income is reported on:

Answer 2

Schedule E, Supplemental Income and Loss

Question 3

Property owners can __ the __ of managing, conserving, and maintaining their rental properties

Answer 3

deduct; expenses

Question 4

Advanced rent must be included in:

Answer 4

the year received

Question 5

If a tenant pays to cancel a lease, the amount received is what type of income? When is the payment included?

Answer 5

rental income; in the year received

Question 6

When is a refundable security deposit not considered income?

Answer 6

if it is refundable at the end of the lease

Question 7

When is a refundable security deposit considered income?

Answer 7

it is income the year the deposit is forfeited by the tenant

Question 8

Treatment of insurance premiums paid in advance

Answer 8

If the premium is paid for a policy period of more than one year, only part of the premium applied to that year can be deducted

Question 9

Rules for local benefit taxes

Answer 9

Charges cannot be deducted if it increases the value of the rental property, only taxes for maintenance or repair, or interest charges related to financing its construction

Question 10

Property or services received in lieu of rent must recognize the ___ as rental income unless there is:

Answer 10

FMV; agreed-upon price

Question 11

If a tenant pays expenses on behalf of the taxpayer, the taxpayer must:

Answer 11

recognize as rental income the amount of rent received in cash and the amount paid for the repairs; however, he can deduct the expenses as rental expense

Question 12

What are the rules for vacant rental property?

Answer 12

You cannot deduct the loss of rental income for the period the property is vacant. However, if you are actively trying to rent the property, you can deduct ordinary and necessary expenses as soon as the property is “made available” for rent.

Question 13

A taxpayer begins to claim deductions for depreciation of a rental property when he:

Answer 13

places it in service for production of income

Question 14

Depreciation ends when a taxpayer has:

Answer 14

fully recovered his cost or other basis, or when the property is retired from service, whichever happens first

Question 15

Three basis factors that determine how much depreciation a taxpayer can deduct:

Answer 15

basis

recovery period of the property

depreciation method used

Question 16

Most residential rental buildings are depreciated over

Answer 16

27.5 years

Question 17

Most nonresidential buildings are generally depreciated over

Answer 17

39 years

Question 18

For a personal home that is later converted to rental property, the depreciable basis is:

Answer 18

the lower of:

the adjusted basis in the property, or

the fair market value of the property at the time of conversion

Question 19

What is the maximum Section 179 deduction in 2019?

Answer 19

$1,020,000

Question 20

Tax treatment of repairs vs improvements to rental property

Answer 20

the cost of repairs to rental property can be deducted

The cost of improvements are depreciated over time separate form the asset or property being improved

Question 21

What is an “improvement” of rental property?

Answer 21

anything that results in the betterment of property, restoration of property, or adaptation of a property to a new or different use

Question 22

What is the de minimis safe harbor rule of tangible property rgulations

Answer 22

you can elect to expense tangible property costing no more than $2,500 per invoice or item in the year they are used or consumed

Question 23

A trade or business activity is considered a ___ activity, if the taxpayer does not ___ in it

Answer 23

passive; materially participate

Question 24

What is the rule on passive activities?

Answer 24

you cannot deduct losses from passive activities to offset nonpassive income

Question 25

Rental activities that require substantial services along with the rental property may be classified as ___; The rentals and expenses are reported on ___ subject to __ tax

Answer 25

business activities; Sch. C, Profit or Loss from Business; Self-employment

Question 26

What is the Special $25,000 Loss Allowance for Real Estate Rental Activities?

Answer 26

you may be able to deduct $25,000 of losses against non-passive income if you actively participate in a rental real estate activity

losses that can’t be deducted due to certain limitations can be carried forward indefinitely

Question 27

To be considered “actively participating” in a rental activity, a taxpayer must:

Answer 27

own at least 10% of the rental property and

make management decisions in a significant and bona fide way

Question 28

The full $25,000 loss allowance is available for single or MFJ taxpayers where their modified adjusted gross income is:

Answer 28

$100,000 or less

Question 29

How is the special allowances for rental losses applied to married taxpayers who file separate returns?

Answer 29

If you file a separate return but lived apart from your spouse for the entire tax year, the special allowance losses cannot exceed $12,500 and this allowance is available if your MAGI is $50,000 or less.

If you lived with your spouse at any time during the year and file separate, you cannot use the allowance to offset nonpassive income

Question 30

What is the rule for rental loss allowances for MAGI exceeding $100,000?

Answer 30

for every $2 by which the MAGI exceeds $100,000, the allowance is reduced by $1; If the MAGI is $150,000 or more ($75,000 MFS), it is fully phased out and must be carried over

Question 31

You file jointly with a MAGI of $140,000 and you have rental losses from residential property of $25,000. You actively manage the property, how much can you deduct against your nonpassive income? How much can you carry over?

Answer 31

140,000 - 100,000 = $40,000

40,000 * 0.5 = 20,000

$25,000 - 20,000 = $5,000 deduction

$20,000 carry over

Question 32

Two most common methods of dividing expenses used for renting only part of a property

Answer 32

number of rooms in the house and

square footage of the house

Question 33

you own a duplex with two units of the same size and you rent out the other. You paid $12,000 mortgage interest and $4,000 real estate taxes for the entire property. How can you deduct the expenses?

Answer 33

$6,000 of mortgage interest and $2,000 real estate taxes can be deducted on Schedule E. While the other $6,000 and $2,000 attributable to your personal use of property can be deducted on Schedule A as itemized deductions

Question 34

If you own a partial interest in a rental property, you can deduct expenses paid according to:

Answer 34

percentage of ownership

Question 35

When a taxpayer has a residence that is used personally at certain times and rented out at other times, he must divide his expenses between ___; rental expenses are generally no more than a taxpayer’s ____ multiplied by

Answer 35

rental use and personal use; total expenses

a fraction whereby the:

numerator: total number of days actually rented at a fair rental price
denominator: total number of days the dwelling is used

Question 36

If a taxpayer uses a property for both rental and personal purposes, the tax treatment of expenses depends on ___.

It is considered as “residence” if:

Answer 36

whether his personal use is considered as “residence”;

he uses the property for personal purposes during the year for more than greater of 14 days or 10% of total days it is rented at a fair rental price.

Question 37

For purposes of partial rental activity, where the property is used for both rental and personal purposes, days of personal use are counted when:

Answer 37

a member of the TP’s family uses the property without paying a fair rental price

anyone uses the property at less than fair rental price

use of the property is donated to a charitable organization

Question 38

renting a dwelling unit that is also used as a residence during the year is not considered a ______, therefore if his rental expenses are more than rental income, he:

Answer 38

passive activity; cannot offset loss from other sources of income

Question 39

If you do not rent the property with the intent to make a profit, you:

Answer 39

cannot deduct rental expenses exceeding the rental income

Question 40

What does renting “not for profit” mean?

Answer 40

it means renting below fair market price

Question 41

Where and how do you report rental activity that doesn’t have a profit motive (1) and where do you report the rental expenses (2)?

Answer 41

1. Form 1040 as “other income”

2. Sch. A

Question 42

What is the 15-day rule?

Answer 42

if a taxpayer rents a main home or vacation home that is considered “residence” for fewer than 15 days, he does not have to recognize any income as taxable nor cannot deduct any rental expenses. This is also called the minimal rental use.

Question 43

What is the rule for a person qualifying as a real estate professional regarding losses from rental real estate?

Answer 43

losses from real estate activities in which he materially participates are not considered passive and are fully deductible

Question 44

To be classified as a real estate professional, you mus:

Answer 44

provide more than 1/2 of total personal services in real property trades or businesses in which you materially participate and

perform more than 750 hours of services during the tax year in real property business activities

Question 45

Operators of hotels, boarding houses, and bed and breakfasts must report their income on ___

Answer 45

Schedule C, Profit or Loss from Business

Question 46

Renting out all or part of a house can be classified for tax purposes as the equivalent of running a bed and breakfast. The facts and circumstances of each situation must be taken into account to determine if the taxpayer is:

Answer 46

providing “substantial services” to a tenant

Question 47

Royalty income is reported on:

Answer 47

Schedule E, Supplemental Income and Loss

Question 48

If you are self-employed writer, musician, or inventor, income is reported on ___ and subject to ___

Answer 48

Sch. C; self-employment tax

Question 49

How are royalty payments reported to the taxpayer?

Answer 49

On Form 1099-MISC, Miscellaneous Income

Question 50

A business is required to issue Form 1099-MISC to each person to whom has has paid at least:

Answer 50

$10 of royalties for the year

Question 51

If an owner makes rental property repairs before placing the property into service, the repairs must be:

Answer 51

capitalized and included in the property’s basis