Real Estate Investing Real Estate Taxation 2 β Questions and Answers
Question 1: What is the maximum amount of capital gains a married couple filing jointly can exclude from the sale of their primary residence under Section 121?
- $250,000
- $500,000 (Correct answer)
- $750,000
- $1,000,000
Correct answer: $500,000
Married couples filing jointly can exclude up to $500,000 in capital gains from the sale of a primary residence under the Section 121 exclusion.
Question 2: In a 1031 exchange, what happens if an investor receives 'boot'?
- The entire exchange is disqualified
- Boot is tax-free
- Boot is taxable to the extent of gain realized (Correct answer)
- Boot reduces the replacement property's basis
Correct answer: Boot is taxable to the extent of gain realized
Boot (cash or non-like-kind property received in a 1031 exchange) is taxable to the investor to the extent of the gain realized on the relinquished property.
Question 3: Which depreciation method is required by the IRS for residential rental property placed in service after 1986?
- 150% declining balance over 27.5 years
- Straight-line over 27.5 years (Correct answer)
- Straight-line over 39 years
- 200% declining balance over 27.5 years
Correct answer: Straight-line over 27.5 years
The IRS requires straight-line depreciation over 27.5 years for residential rental property placed in service after 1986 under MACRS.
Question 4: What is a 'qualified opportunity zone' investment's primary tax benefit for investors who hold for at least 10 years?
- Deduction of 100% of the investment in year one
- Permanent exclusion of gains on the QOZ investment itself (Correct answer)
- No property taxes on the investment
- Double depreciation deductions
Correct answer: Permanent exclusion of gains on the QOZ investment itself
Investors who hold a qualified opportunity zone investment for at least 10 years can permanently exclude from income any gains on that QOZ investment itself.
Question 5: Under the passive activity loss rules, which type of real estate investor can deduct up to $25,000 in rental losses against ordinary income?
- Any investor who owns at least one rental property
- Active participants with adjusted gross income below $100,000 (Correct answer)
- Only real estate professionals
- Investors with at least 10 rental units
Correct answer: Active participants with adjusted gross income below $100,000
Active participants in rental activities with AGI below $100,000 may deduct up to $25,000 in rental losses against ordinary income; this allowance phases out between $100,000 and $150,000 AGI.
Question 6: What is 'cost segregation' used for in real estate taxation?
- Separating deductible repairs from capital improvements
- Accelerating depreciation by reclassifying components to shorter recovery periods (Correct answer)
- Allocating purchase price between land and building
- Tracking depreciation recapture amounts
Correct answer: Accelerating depreciation by reclassifying components to shorter recovery periods
Cost segregation studies identify and reclassify building components to shorter depreciable lives (5, 7, or 15 years), accelerating depreciation deductions and improving cash flow.
Question 7: When an investor sells a rental property for a gain, the portion attributable to previously claimed depreciation is taxed at what maximum federal rate?
- 15%
- 20%
- 25% (Correct answer)
- 37%
Correct answer: 25%
Depreciation recapture on real property (unrecaptured Section 1250 gain) is taxed at a maximum federal rate of 25%, regardless of the taxpayer's regular capital gains rate.
Real Estate Investing Real Estate Taxation 2
What is the maximum amount of capital gains a married couple filing jointly can exclude from the sale of their primary residence under Section 121?