Taxation Chapter 13 Quiz

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Questions and Answers

What is the adjusted cost basis of the building being sold by James?

  • $700,000
  • $720,000
  • $10,000
  • $770,000 (correct)

What is the nature of Judy's capital gain from the transaction with Bruce?

  • A capital gain, but not a capital loss (correct)
  • Either a capital gain or a capital loss
  • A capital loss, but not a capital gain
  • Neither a capital gain nor a capital loss

What is the deferred gain available to Judy in the exchange?

  • $90,000 and $5,000
  • $10,000 and $30,000
  • $45,000 and $15,000 (correct)
  • $70,000 and $15,000

Which of the following can result in a tax advantage related to real estate transactions?

<p>A tax-free exchange (C)</p> Signup and view all the answers

What is the time frame during which tax-deferred exchanges must be completed?

<p>2 years (C)</p> Signup and view all the answers

Which of the following expenses is not tax-deductible?

<p>An uninsured loss from damages (B)</p> Signup and view all the answers

What is the correct cost basis for the new house purchased for $657,000?

<p>$657,000 (A)</p> Signup and view all the answers

On what basis is a property considered for tax-free exchange?

<p>Used in a trade or business (C)</p> Signup and view all the answers

What is a requirement for a property to be exchanged in a like-kind exchange?

<p>It must be used in a business (C)</p> Signup and view all the answers

What type of property may be used in an exchange?

<p>A personal residence (B)</p> Signup and view all the answers

Which type of property can be depreciated for income tax purposes?

<p>An owner-occupied farmhouse (C)</p> Signup and view all the answers

Which of these expenses can be deducted from ordinary income for tax purposes?

<p>Cleaning and maintenance costs (A)</p> Signup and view all the answers

What does it mean if the basis of a property decreases?

<p>The property is worth less over time (D)</p> Signup and view all the answers

What is required for property to be validly exchanged in trade or investment purposes?

<p>Both properties must have mortgages (B)</p> Signup and view all the answers

Which financial reporting method may an owner of an apartment complex use?

<p>Cash basis (A)</p> Signup and view all the answers

Flashcards

Installment Sale

A business transaction where the seller agrees to receive payment for their property over a period of time. Instead of paying a lump sum, the buyer makes payments in installments, usually with interest.

Tax-Free Exchange

A tax-free exchange occurs when you trade one property for another of like kind without paying capital gains taxes.

Capital Loss

When a property is sold for less than its purchase price, resulting in a financial loss for the seller.

Capital Gain

The profit realized when a property is sold for more than its purchase price.

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Deferred Gain

A type of income tax deferment that allows investors to put off paying taxes on capital gains until the property is actually sold. This is often used for real estate investments.

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Cost Basis

The price paid for a property, including any improvements or debt, used to calculate capital gains or losses.

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Market Value

A property's value based on its current market conditions. This is calculated by a licensed appraiser.

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Appraised Value

A property's value is determined by a licensed appraiser through various methods, including comparable sales, cost approach, and income capitalization.

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Recognized Gain

The profit realized from the sale of an investment property, which is often subject to income tax.

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Mortgage Interest Deduction

The ability to deduct mortgage interest paid for your primary residence on your tax return.

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Tax-Free Residence Exchange

Exchanging a personal residence for another of similar value is a tax-free transaction.

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Deductible Loss on Personal Residence

A loss on the sale of a personal residence is not deductible for income tax purposes.

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Depreciable Property

Depreciable property is an asset that loses value over time and can be deducted from income for tax purposes.

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Depreciable Commercial Property

A commercial apple orchard is a depreciable asset that can be deducted for income tax purposes.

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Non-Depreciable Personal Residence

An owner-occupied farmhouse is not considered a depreciable asset for income tax purposes.

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Deductible Property Expenses

For tax purposes, property owners can deduct certain expenses from their income, such as interest and property taxes.

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Cash Basis Income Reporting

The owner of an apartment complex would report income on a cash basis, meaning income is recognized when it's received.

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Study Notes

Chapter 13 Quiz - Study Notes

  • Question 1: Judy owns an apartment building worth $800,000 with a $770,000 adjusted cost basis and a $720,000 mortgage. She exchanges it for a shopping center worth $785,000 with a $700,000 mortgage and $10,000 cash. Judy's actual gain is $45,000, with $15,000 deferred gain.

  • Question 2: Tax advantages can result from tax-free exchanges, installment sales, and depreciation deductions.

  • Question 3: Adam, holding unimproved property for investment, can deduct losses on the sale of the property, not annual appreciation.

  • Question 4: Depreciable properties include commercial apple orchards, not owner-occupied farmhouses, vacant land, or any of the above.

  • Question 5: Depreciation on real property lowers the property's basis, not increases it or makes it worthless.

  • Question 6: Selling a home can result in a capital gain or loss.

  • Question 7: Married couples or individuals residing in a principal residence for at least two years qualify for the capital gain exclusion.

  • Question 8: Tax-free exchanges involve exchanging like-kind properties used in trade or business or held for income. Personal residences can be exchanged for similar properties.

  • Question 9: A property must be improved and used in business or held for investment to be tax-depreciable.

  • Question 10: Tax-deductible expenses for personal residences include cleaning and maintenance, but not cleaning, repair, or property taxes and interest.

  • Question 11: An owner is not allowed to deduct painting a bathroom, the cost of uninsured fire damage, property taxes, or mortgage interest on their owner-occupied residence.

  • Question 12: Seymour's recognized gain in selling his home is $125,000. The cost basis of his new home is $657,000.

  • Question 13: Kathy and John will pay capital gains tax on $32,000.

  • Question 14: Condominium owners can deduct interest on a mortgage on common areas, but not unit repairs.

  • Question 15: Lost income from vacancy is not tax-deductible.

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