Income Tax in Real Estate Transactions

Question 1

Active income – Money earned through…

Answer 1

salaries or in a business in which the taxpayer actively participates.
(Example: a typical full-time job).

Question 2

Passive income – Money earned from…

Answer 2

investing in a business venture or partnership.

Example: income earned from a rental property

Question 3

Portfolio income – Money earned from…

Answer 3

Interest, annuities, dividends, and royalties.

Example: income earned from investing in stocks, bonds, mutual funds

Question 4

Tax shelters are any method of reducing…

Answer 4

taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments.

Question 5

One of the advantages that real estate offers to investors is a…

Answer 5

tax shelter, which allows investors to only pay income taxes on a portion of their properties cash flow (or pay no taxes at all).

Question 6

A 1031 tax-deferred exchange allows an individual to…

Answer 6

defer capital gains taxes on real estate bought and sold for investment purposes.

Question 7

In order to qualify for a tax-deferred exchange (1031 Exchange), the properties must be

Answer 7

“like-kind”.

Commercial properties must be exchanged for other commercial properties.
This may be an office building for a shopping mall, an apartment building for a tract of land, or an office building for an apartment building.

Question 8

Depreciation is a…

Answer 8

paper loss required for estimated wear, tear, and obsolescence of a property.

Question 9

The IRS allows real estate investors to…

Answer 9

depreciate their investment properties.

Question 10

Residential buildings and improvements are depreciable over…

Answer 10

27.5 years using straight-line depreciation.

Question 11

Commercial buildings and improvements depreciate over…

Answer 11

39 years using straight-line depreciation.

Question 12

Straight-line depreciation means that the…

Answer 12

portion allocated to the building is divided by 27.5 (Residential) or 39 (commercial) to determine an equal amount of depreciation allowance each year.

Question 13

Adjusted basis is the…

Answer 13

original cost or other basis plus certain additions and minus certain deductions such as depreciation and casualty losses.

Question 14

Capital gain is the…

Answer 14

profit realized from the sale of any capital investment including real estate.

Question 15

Capital gain occurs when an…

Answer 15

investor sells the property for more than the adjusted basis.

Question 16

Capital Gain Tax Break is a special exclusion in the IRS law gives…

Answer 16

home sellers a tax break on capitals gains when they are selling their home.

Question 17

Home sellers may be eligible to exclude up to…

Answer 17

$250,000 if single or up to $500,000 if married of the capital gain on the sale of the residence.

Question 18

The IRS allows homeowners certain deductions on their income taxes. These include:

Answer 18

1) Property taxes: this applies to property taxes paid on a primary resident and second homes/vacation homes.
2) Mortgage interest

Question 19

The following closing costs are NOT tax deductible:

Answer 19

1) Appraisal fees
2) Notary fees
3) Preparation costs for the mortgage
4) Mortgage insurance premiums
5) VA funding fees

Question 20

Certain qualified individuals may be eligible for a partial exemption in their property taxes. These include:

Answer 20

– Veterans
– Senior Citizens
– Disabled

Question 21

The STAR program allows qualified…

Answer 21

owner-occupied, primary residences to be exempt from school property taxes.