B. after-tax cash flows (ATCF)
1. The direct ownership of commercial real estate produces cash flows from rental operations and, perhaps, cash flow from an eventual sale of the property. Since financial leverage and tax considerations play an important part in determining an investor's
C. the Internal Revenue Code
2. U.S. tax law is designed to raise revenues for the operations of the federal government and to promote certain socially desirable real estate-related activities. Tax legislation is combined into a single section of the federal statutory law commonly re
B. depreciation
3. Under certain circumstances, investors are permitted to reduce the amount of the taxable income that they report by an amount that is intended to reflect the wear and tear of an asset over time. This is commonly referred to as:
A. appreciation
B. depre
C. Trade or business property
4. For purposes of federal income taxes, real property is classified into four categories. With which of the following types of real estate is the investor able to reduce his taxable income to reflect the wear and tear of a property over time?
A. Personal
C. Trade or business property
5. Suppose a taxpayer owns an apartment complex. Under U.S. tax law, in what category would this property be classified?
A. Personal residence
B. Dealer property
C. Trade or business property
D. Investment property
D. Investment property
6. Distinguishing between the four categories of real estate for federal tax purposes can be misleading at times. Which of the following categories includes properties that are held primarily for capital appreciation?
A. Personal residence
B. Dealer prope
C. Passive activity income
7. There are three main types of income subject to federal taxation. Which of the following types of income includes income generated from rental real estate investments?
A. Active income
B. Portfolio income
C. Passive activity income
D. Residual income
A. can be used to offset positive taxable income from other passive activities.
8. When cash flows are classified as passive activity income, investors are subject to passive
activity loss restrictions. These restrictions imply that passive income losses:
A. can be used to offset positive taxable income from other passive activities.
B. Capital gain tax rates
9. When an investment appreciates in value during the investment holding period, the appreciation is generally taxed at which of the following rates?
A. Ordinary tax rates
B. Capital gain tax rates
C. Portfolio income tax rates
D. Active income tax rates
C. 28%
10. Since many commercial properties are held by limited liability corporations or limited partnerships, it is important to understand the tax consequences at the individual investor level. Individuals face different tax rates depending on the level of th
A. Operating expenses
11. Certain costs associated with a property's upkeep as well as the manner in which it was financed can be depreciated and therefore have a beneficial impact on the tax paid by the investor in a particular year. Which of the following cash outflows is de
B. 10% to 30%
12. The value of a property can be thought of as having two components, a land component and a building component. Since the land component of the original cost basis is not depreciable, it is important to understand how much of the property's value is ty
D. 27 � years
13. Congressional legislation has repeatedly altered the period of time over which rental real estate may be depreciated. Currently, residential income producing property (e.g. apartments) may be depreciated over no less than:
A. 3 years
B. 7 years
C. 15
B. A $1 tax credit reduces the investor's tax liability by $1.
14. Current tax law allows investors to take tax credits for the cost of renovating or rehabilitating older or historic structures and for the construction or rehabilitation of qualified low-income housing. Which of the following statements regarding tax
C. Like-kind exchange
15. The potentially large amount of taxes due on sale of commercial property has caused investors and policy makers to seek ways to defer taxes on the disposition of a property. A popular option has become for investors to swap one eligible property for a
D. A retail property for an office property, both within the U.S.
16. In a like-kind exchange, property owners must meet a number of conditions in order to be eligible to take advantage of this tax deferment. One criterion is for the exchange to be between "like-kind" properties. Which of the following exchanges represe
D. 12 months
17. The benefit of being classified as a capital gain is that the income is subject to a tax rate that maxes out at 15%, which may be well below the tax rates associated with depreciation recapture income and ordinary income for a particular investor. In
C. 25%
18. All taxable income from investment property sales must eventually be classified as either ordinary income, depreciation recapture income, or capital gain income. What is the
maximum tax rate that an investor can be charged on depreciation recapture in
B. dealer property
19. Johnson Builders is in the new residential construction business. They built a house that sat empty for 6 months after its completion. This type of property would be categorized as a:
A. personal residence
B. dealer property
C. trade or business prope
B. straight line method
20. Sharon purchased a new photocopier for her business. According to her accountant, she can deduct 1/7th of its original cost each year for the next seven years from her taxable income. This depreciation method is commonly referred to as:
A. declining b
C. 35%
21. Limited liability companies (LLCs) and limited partnerships are preferred to corporate ownership structures because these forms of ownership allow investors to obtain limited liability and avoid the double taxation faced by corporations. This tax bene
A. Section 1231
22. The tax treatment of real estate holdings that are classified as trade or business property and are held for more than one year is more commonly referred to as which of the following sections of the tax code?
A. Section 1231
B. Section 1031
C. Section
D. Losses on the sale of a personal residence can be deducted from federal taxable income
23. Homeowners receive preferential tax treatment under current federal income tax laws. The benefits that homeowners receive from this treatment include all of the following EXCEPT:
A. Appreciation in the value of the home that has occurred since the tim
A. 2.6%
24. Given the following information, calculate the straight-line depreciation rate for the first year using the midmonth convention. Cost recovery period: 27 � years, Date of purchase: April 10th.
A. 2.6%
B. 3.63%
C. 19.5%
D. 70.8%
D. $12,963
25. Given the following information, calculate the depreciation allowance for year 1. Depreciable Basis: $200,000, Declining Balance Depreciation: 175%, Cost Recovery Period: 27 years.
A. $3,704
B. $6,481
C. $7,407
D. $12,963
D. $115,500
26. Given the following information, calculate the taxes due on sale for the following fully taxable sale. Net Sale Proceeds: $1,500,000, Adjustable Basis: $830,000, Depreciation Recapture: $150,000, Capital Gain Tax: 15%, Depreciation Recapture tax: 25%.
B. $200
27. The use of mortgage debt to finance an income property investment has certain tax consequences. For example, up-front financing costs for investment properties are not fully deductible in the year in which they are paid. Instead, they must be amortize
B. $5,200
28. The tax treatment of up-front financing costs calls for these expenses to be amortized over the life of the loan. However, if the loan is prepaid prior to the term of the loan (perhaps because the property is sold), the tax treatment of these costs ch
D. 66.66%
29. Accelerated methods of depreciation result in greater depreciation allowances than straight-line depreciation in the early years of the depreciation schedule. Suppose a personal property is eligible for a three-year cost recovery period and can be dep