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What did the Taxpayer Relief Act do with regard to capital gains?
Reduced the top rate on profits from 28% to 20% for assets held at least 18 months, retroactive to May 7, 1997. Taxpayers in the 15% bracket now pay 10% tax.
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How does the IRS definition of a first-time home buyer differ from the standard definition?
Technically, the person doesn't have to be purchasing his or her very first home. The person qualifies under the tax rules as long as that person did not own a principal residence at any time during the two years prior to the acquisition date of the new home.
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What is the difference between a realized and an unrealized capital gain?
A realized capital gain is an investment that has been sold at a profit. An unrealized capital gain is an investment that hasn't been sold yet but would result in a profit if sold.
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Define the terms amount realized, basis and adjusted basis.
- Amount realized - The sale price of the property minus the costs of the sale.
- Basis - A measurement of how much is invested in the property for tax purposes.
- Adjusted basis - The initial or beginning basis, plus capital improvement, minus exclusions, credits or other amounts received.
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What are the capital gains exclusions associated with the sale of a personal residence and how often can the exclusion be used?
A single seller can exclude up to $250,000 of gain and a couple can exclude up to $500,000. The exclusion can be used once every two years.
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What is the difference between active income and passive activity income?
Active income is income for which the taxpayer performs services. Passive activity income is income from rental activity, limited business interests or other activities in which the investor does not materially participate.
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What tax deduction can an owner of an income-producing property take that the owner of a personal residence cannot take?
Depreciation
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What is the definition of a like-kind exchange?
One property can be exchanged for another property regardless of the property type, as long as it is held as an investment or for use in a trade or business.
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List three kinds of property eligible for like-kind exchange. (See Page #22 for other correct answers.)
- Apartments and residential rentals
- Commercial property
- Industrial property
- Farms
- Leaseholds greater than 30 years
- Unimproved land (non-dealer held property)
- Hotels or motels
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What is boot and is it taxable?
In a like-kind exchange, any cash or relief one party receives in addition to the actual property is called boot. The person who receives the boot has a net gain and must pay taxes on it.
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What kinds of mortgage loans are eligible for interest tax deductions? 4
- A mortgage to buy a home
- A second mortgage
- A line of credit
- A home equity loan
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What is grandfathered debt?
Debt on mortgages taken out on or before October 13, 1987.
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What is home acquisition debt?
Home acquisition debt or financing is a mortgage that was taken out after October 13, 1987 to buy, build or substantially improve a qualified home - defined as a main or second home.
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What is the IRS rule about deducting the full amount of points in the year they are paid?
As a general rule, a homeowner cannot deduct the full amount of points in the year they are paid. Because they are prepaid interest, the borrower will usually deduct them equally over the life of the mortgage. However if the homeowner meets a set of nine tests the IRS has set out, the full amount of the points may be deducted in the year paid.
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What is the IRS rule about deducting prepayment penalties?
A homeowner may deduct the penalty as home mortgage interest provided the penalty is not for a specific service performed or a cost incurred in connection with the mortgage loan.
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What is the definition of a low-income household?
A low-income household is defined as one having an income of 60 percent or less of the area median adjusted for household size.
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What is the class life for residential and non-residential buildings?
- Residential is 27.5 years.
- Non-residential is 39 years.
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What is straight-line depreciation?
Straight-line depreciation means that the depreciation is computed by dividing the building's cost by the number of years of its class life.
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is the amount by which an asset's selling price exceeds its initial purchase price.
Capital gain
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is an investment that has been sold at a profit.
A realized capital gain
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An unrealized capital gain is an investment that
hasn't been sold yet but would result in a profit if sold.
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Short-term capital gains are
profits received from the sale of capital assets that were held for less than a year.
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Long-term capital gains are profits on
capital assets held for longer than a year.
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An individual has a capital loss if he
or she sells an asset for less than the purchase price.
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The IRS defines gain on the sale of a home as the
amount realized from the sale minus the adjusted basis of the home sold.
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Basis is a measurement of
how much is invested in the property for tax purposes.
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The tax laws allow a special exclusion on capital gains for homeowners selling their own home. A seller can exclude up to___ of any capital gain on the sale. If the sellers are a married couple, they can exclude up to ___in gain. This exclusion can be used once every___ years.
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Active income is
income for which the taxpayer performs services.
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income from rental activity, limited business interests or other activities in which the investor does not materially participate.
Passive activity income is
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is income for which the taxpayer performs services.
Active income
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is income from rental activity, limited business interests or other activities in which the investor does not materially participate.
Passive activity income
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is income from such sources as dividends, interest, capital gains, and royalties.
Portfolio income
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During the time that a property owner holds an investment property, he or she can take a tax deduction known as______
depreciation.
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Under Section 1031, a property that is held for productive use in a trade or business can be exchanged for like-kind property. This is also known as a __________
tax-deferred exchange.
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The properties must be "___-___in nature or character, not in use, quality or grade. Real estate investors must realize that one property can be exchanged for another property regardless of the property type, as long as it is held as an investment or for use in a trade or business.
like-kind"
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Any cash or relief one party receives in addition to the actual property is called ____
boot.
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The IRS requires that a Qualified Intermediary (QI) must be used to facilitate the 1031 exchange transaction. A Qualified Intermediary is responsible for performing the following activities in a 1031 Exchange: 4
- Acquiring the relinquished property from the taxpayer
- Transferring the relinquished property to the buyer
- Acquiring the replacement property from the seller
- Transferring the replacement property to the taxpayer
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There are two important timelines that apply to 1031 exchanges.
The identification period is the critical period during which the party selling a property must identify other replacement properties that he or she proposes or wishes to buy. This period is scheduled as exactly 45 days from the day of selling the relinquished property.
The exchange period is the period within which a person who has sold the relinquished property must receive the replacement property. This period ends at exactly 180 days after the date on which the person transfers the relinquished property or the due date for the person's tax return for the taxable year in which the transfer of the relinquished property took place, whichever situation is earlier.
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There are several different types of exchanges: 4
- Simultaneous Exchange
- Delayed Exchange
- Build-to-Suit (Improvement or Construction) Exchange
- Reverse Exchange
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If all of a homeowner's mortgages fit into one or more of the following three categories at all times during the year, the homeowner can deduct all of the interest on those mortgages.
- Mortgages taken out on or before October 13, 1987. This is called grandfathered debt.
- Mortgages taken out after October 13, 1987 to buy, build, or improve the home. This is called home acquisition debt.
- Mortgages taken out after October 13, 1987 other than to buy, build, or improve the home. This is called home equity debt.
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The total amount that can be treated as home acquisition debt at any time on the main and second home cannot be more than $____($____if married filing separately). This limit is reduced by the amount of any grandfathered debt.
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The amount of debt that can be treated as home equity debt has a limit. The total home equity debt on a main and second home is limited by the smaller of these:
$___($___if married filing separately)
The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. The homeowner must determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home.
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The term "___" describes certain charges that are paid, or treated as paid, by a borrower to obtain a home mortgage. The IRS says that as a general rule, a homeowner cannot deduct the full amount of points in the year they are paid. Because they are prepaid interest, the borrower will usually deduct them equally over the life of the mortgage.
points
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A homeowner can fully deduct points in the year paid if he or she meets all of the___ tests set out by the IRS.
nine
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Points paid on a second home cannot be fully deducted in the year paid. They can only be deducted over_________
the life of the loan.
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A homeowner may deduct a prepayment penalty as home mortgage interest provided the penalty is not for a specific___ ___ or a cost incurred in connection with the mortgage loan.
service performed
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The Low-Income Housing Credit Program (LIHC) was established under the___ to promote private sector involvement in the retention and production of rental housing that is reserved for low-income households.
Tax Reform Act of 1986
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A low-income household is defined as one having an income of__ percent or less of the area median adjusted for household size.
60
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is a deduction that allows an investor to write off the cost of his or her investment in income-producing property.
Tax depreciation
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The class life for qualifying residential structures, which are defined as buildings that get 80% of their gross rents from residential tenants, is ___years.
27.5
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The class life for nonresidential buildings purchased after May 12, 1993 is __ years.
39
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Real property is depreciated on a straight-line basis over its class life. Straight-line depreciation means that the depreciation is computed by dividing the_______ by the number of_______
- building's cost
- years of its class life.
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Matt sold his house for $2,200,000 and had $195,000 in closing costs. His beginning basis was $1,955,000 and he spent $5,000 on capital improvements. What is Matt's capital gain for tax purposes? (assume he doesn't qualify for an exclusion)
$45,000
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A loss on which of these properties can never be claimed on income taxes?
Apartment building
Retail store
Development lot
Personal residence
Personal residence
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The Low-Income Housing Credit Program provides ______________ in federal income tax liability for project owners who develop rental housing that serves low-income households with incomes up to 60% of area median income.
a larger standard deduction
a $1,000 tax credit
a dollar-for-dollar tax deduction
a dollar-for-dollar tax credit
a dollar-for-dollar tax credit
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Stan sold his investment property for $97,000 and had $8,000 in closing costs. The property had a beginning basis of $77,000, capital improvements of $4,000, and depreciation of $15,000. What was Stan's capital gain?
$97,000
$31,000
$7,000
$23,000
$23,000`
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Which of the following statements about points is true?
A homeowner can never deduct the full amount of points in the year they are paid.
In most cases, points paid to refinance a mortgage are deductible in full in the year they were paid.
Points paid on a second home can only be deducted over the life of the loan.
Points on home improvement loans are always fully deductible in the year they were paid.
Points paid on a second home can only be deducted over the life of the loan
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On what properties can the owner take a mortgage interest deduction?
Properties without a mortgage
Unqualified homes
Properties they do not own
A qualified primary or second home
A qualified primary or second home
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What is a measurement of how much is invested in the property for tax purposes?
Market value
Amount realized
Basis
Capital gain
Basis
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In a 1031 exchange, what is the period within which a person who has sold the relinquished property must receive the replacement property?
The exchange period
The identification period
The initiation period
The qualification period
The exchange period
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Homeowners can deduct all but which of the following from their income taxes?
Mortgage interest
Depreciation
Prepayment penalties
Property taxes
Depreciation
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What is the formula to calculate straight-line depreciation on an income property?
Divide the building's cost by the number of years of the building's class life
Divide the building's cost by the current age of the building
Divide the building's market value by the number of years of the building's class life
Divide number of years of the building's class life by the building's market value
Divide the building's cost by the number of years of the building's class life
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Which of the following would prevent the homeowner from deducting home mortgage interest?
The homeowner itemizes deductions on Schedule A of Form 1040.
The homeowner is not legally liable for the loan.
The homeowner has a true debtor-creditor relationship with the lender.
The mortgage is a secured debt on a qualified home.
The homeowner is not legally liable for the loan.
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The ______________ is responsible for preparing all of the appropriate documentation for a 1031 exchange transaction, securing the funds in an escrow account until the exchange is completed and submitting a 1099 form to the taxpayer and the IRS for any gross proceeds paid.
initiator
qualified intermediary
taxpayer
IRS
qualified intermediary
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What are the two rules of the exclusion on capital gains for homeowners?
That the exclusion can be used once every ten years and that the house was occupied by the seller for the last five years.
That the exclusion can be used once every two years and that the house was occupied by the seller two of the last five years.
That the exclusion can be used once every ten years and that the house was occupied by the seller two of the last five years.
That the exclusion can be used once every two years and that the house was occupied by the seller for the last five years
That the exclusion can be used once every two years and that the house was occupied by the seller two of the last five years.
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Sam purchased an apartment building in April of 2017. His initial basis on the building is $395,250. What is his monthly depreciation allowance?
$844.55
$1,197.73
$1,765,42
$2,195.83
$1,197.73
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What do we call investment funds from investors who do not materially participate in managing the investment?
Active income
Portfolio income
Passive activity income
Net income
Passive activity income
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Which of the following is not an example of a like-kind exchange?
A principal residence for a motel
Vacant lot for a store
Rental condo for a gas station
Bed & Breakfast Inn for two small farms
A principal residence for a motel
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In what type of exchange is the replacement property acquired prior to transferring the relinquished property?
Delayed exchange
Build-to-suit exchange
Reverse exchange
Simultaneous exchange
Reverse exchange
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Which provision of the Taxpayer Relief Act of 1997 allowed first time buyers to use IRA funds for a house purchase?
Capital gains
Retirement savings
Home sales
Alternative minimum tax
Retirement savings
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Derek bought his home for $250,000. He made $25,000 of improvements. Derek sold the home for $895,000 and paid $90,000 in selling expenses, including the broker's commission. On what amount will Derek pay capital gains tax?
$530,000
$280,000
$30,000
$895,000
$280,000
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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?
$175,000
$1,085,000
$546,000
$46,000
$46,000
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