When it's recorded, it gives actual notice of its content.

Real Estate License Practice Test – Transfer of Property 1 — Questions and Answers

Question 1: Miguel recorded a grant deed to Tom. Miguel afterward changed his mind and attempted to cancel the delivery, saying there had been no delivery to Tom. Why did Miguel's attempt fail?

He was unsuccessful only if Tom can prove he took possession.
The deed is acknowledged by recording it.
With recording, delivery and acceptance are assumed. (Correct answer)
The act of recording establishes an entry in the title chain.

Correct answer: With recording, delivery and acceptance are assumed.

When a deed is recorded in public records, it creates a legal presumption that the deed has been delivered by the grantor and accepted by the grantee. This act provides constructive notice to the world of the transfer of ownership. Therefore, once recorded, Miguel cannot unilaterally claim there was no delivery to invalidate the transfer.

Question 2: Bell got $950,000 for her home residence. She paid $750,000 for the house four years ago. During her ownership, she invested $300,000 in capital renovations. What may Bell deduct on her tax return?

3000 gain
700, 000 gain
150,000 loss
None of the above (Correct answer)

Correct answer: None of the above

Bell's adjusted cost basis is her original purchase price plus capital renovations ($750,000 + $300,000 = $1,050,000). Since her selling price ($950,000) is less than her adjusted cost basis, she incurred a loss of $100,000. Under federal income tax laws, losses on the sale of a personal residence are not tax-deductible.

Question 3: A deed is a ____

provides constructive feedback
It is not necessary to record the transfer of title. (Correct answer)
Buyer occupancy is required.
When it's recorded, it gives actual notice of its content.

Correct answer: It is not necessary to record the transfer of title.

A deed is a legal instrument that transfers title to real property. While recording a deed provides constructive notice to the public and protects the grantee's interest against subsequent claims, it is not a legal requirement for the transfer of title itself to be valid between the grantor and grantee. The transfer of title occurs upon proper delivery and acceptance of the deed.

Question 4: In the case of an owner-occupied single-family dwelling, which of the following is not tax deductible under federal income tax laws?

Interest payments on a mortgage.
A prepayment penalty was incurred on a mortgage.
Taxes on property
Expenses for landscaping. (Correct answer)

Correct answer: Expenses for landscaping.

Under federal income tax laws, certain expenses for an owner-occupied single-family dwelling are tax-deductible, such as mortgage interest payments, property taxes, and sometimes mortgage prepayment penalties. However, expenses for landscaping are considered personal maintenance or improvements and are generally not tax-deductible.

Question 5: A written summary of the chain of title is known as a (n) ____ once the public records have been reviewed.

Affidavit of Title
guarantee of title
a title acknowledgement
the title's abstract (Correct answer)

Correct answer: the title's abstract

An abstract of title is a condensed history of all recorded documents affecting a particular parcel of real estate. It is prepared by an abstractor after reviewing public records and summarizes the chain of ownership, liens, encumbrances, and other relevant legal instruments. This document helps determine the current status of the title.

Question 6: A real estate licensee is prohibited from doing all of the following, except , unless otherwise/vise licensed.

draft building plans
real estate for sale (Correct answer)
provide tax advice
provide legal counsel

Correct answer: real estate for sale

A real estate licensee's primary function is to facilitate transactions involving real estate, such as buying, selling, or leasing properties. Therefore, engaging in 'real estate for sale' is a core and permissible activity for a licensee. The other options (drafting building plans, providing tax advice, providing legal counsel) require separate professional licenses and fall outside the scope of a standard real estate license, making them prohibited unless the licensee holds those additional qualifications.

Question 7: The word "recurring costs" is used in an escrow statement to refer to

prorations of insurance
fees for recording
Account items are impounded. (Correct answer)
Fees for title insurance

Correct answer: Account items are impounded.

In an escrow statement, 'recurring costs' refer to expenses that are paid repeatedly over time, such as property taxes and insurance premiums. These funds are typically collected by the lender and held in an impound or escrow account. This ensures that these ongoing obligations are met, protecting both the homeowner and the lender's interest in the property.

Question 8: Which of the following individuals or entities is prohibited from working in the escrow industry?

Broker in real estate
An lawyer
The transaction's principal (Correct answer)
A corporation that is either domestic or international.

Correct answer: The transaction's principal

An escrow holder must maintain strict neutrality and impartiality in a real estate transaction. The principals (buyer and seller) are directly involved and have vested interests, which would compromise the unbiased role required of an escrow agent. Therefore, a principal in the transaction is prohibited from acting as the escrow holder for that specific transaction.

Question 9: Sarah Collins, a single woman, holds the recorded title to a piece of real estate. She executes a transfer to the property exclusively in the name of Angel Castro, a married woman, after her marriage to James Castro. The following is a discrepancy in the grantor's name:

a cloud on the title. (Correct answer)
immaterial so long as the property is adequately described.
a flaw that could turn both spouses' separate property into joint tenancy property
consequently cured after 90 days

Correct answer: a cloud on the title.

A 'cloud on the title' refers to any outstanding claim, encumbrance, or discrepancy that impairs the owner's clear title to the property. In this scenario, the change in the grantor's name and marital status (from Sarah Collins, single, to Angel Castro, married) without clear documentation linking the two identities creates an inconsistency in the chain of title. This makes the ownership unclear and could hinder future transfers, thus constituting a cloud on the title.

Question 10: Mr. Rodrigo's duplex had a $750,000 cost base when he bought it. According to the tax assessor, the value breakdown is 80 percent renovations and 20 percent land. Mr. Rodrigo depreciated the improvements at a rate of 2% per year for the first five years. Mr. Rodrigo then paid $50,000 to a licensed contractor to install a swimming pool. How much will the property's modified cost base be once the pool is finished?

700,000
740,000 (Correct answer)
790,000
730,000

Correct answer: 740,000

The modified cost base is calculated by taking the original cost, subtracting accumulated depreciation on the improvements, and then adding the cost of any new capital improvements. Mr. Rodrigo's initial cost base was $750,000, with $600,000 for improvements (80%) and $150,000 for land (20%). After 5 years of 2% depreciation on improvements ($12,000/year), total depreciation is $60,000. The adjusted basis for improvements is $600,000 - $60,000 = $540,000. Adding the land value ($150,000) and the new swimming pool ($50,000) results in a modified cost base of $540,000 + $150,000 + $50,000 = $740,000.

Question 11: The title chain refers to ____.

A property's equity plus the debt that encumbers it.
a complete record of all conveyances and encumbrances influencing a property's title (Correct answer)
the title's abstract
a report on the title

Correct answer: a complete record of all conveyances and encumbrances influencing a property's title

The 'chain of title' is a historical record that meticulously traces the ownership of a property from its original grant to the present day. It encompasses all transfers of ownership (conveyances) and any encumbrances, such as mortgages or liens, that have affected the property's title over time. This comprehensive record is essential for establishing clear ownership and identifying any potential defects.

Question 12: A standard title insurance policy covers the ____

encroachments.
any of the parties' incompetence (Correct answer)
zoning regulations
an easement by prescription.

Correct answer: any of the parties' incompetence

A standard title insurance policy primarily protects against defects in the title that are discoverable through a thorough search of public records. This includes issues like forgery, fraud, or the legal incompetence of a party involved in a previous transaction, which would render a deed invalid. Other issues like encroachments, zoning regulations, or unrecorded easements by prescription typically require a physical inspection or survey and are usually not covered by a standard policy.

Question 13: A probate property is valued at $960,000. The highest bid at auction is $900,000. Any other offer would have to be at least for the court to consider it.

945,500 (Correct answer)
900,000
1,100,000
930,000

Correct answer: 945,500

In California probate sales, if an initial bid is accepted, any subsequent overbid in court must meet specific statutory requirements. The first overbid must exceed the original accepted bid by at least 10% of the first $10,000, plus 5% of any amount over $10,000. For an initial bid of $900,000, this calculation is: $900,000 (original bid) + ($10,000 * 0.10) + (($900,000 - $10,000) * 0.05) = $900,000 + $1,000 + $44,500 = $945,500.

Question 14: An ad valorem tax is defined as which of the following?

Use tax.
Taxes on income
Addition of value
Tax on real estate. (Correct answer)

Correct answer: Tax on real estate.

The term 'ad valorem' is Latin for 'according to value.' An ad valorem tax is a tax whose amount is directly proportional to the assessed value of the item being taxed. Property taxes, which are levied on real estate based on its appraised value, are the most common example of an ad valorem tax.

Question 15: Which of the following is the most likely reason for a real estate sales escrow to be terminated?

The buyer's revocation by the broker.
The buyer's and seller's mutual agreement. (Correct answer)
The seller's cancellation of the escrow.
The seller's death

Correct answer: The buyer's and seller's mutual agreement.

An escrow for a real estate sale is essentially a contractual agreement between the buyer and seller, managed by a neutral third party. Like any contract, it can be terminated by the mutual consent and agreement of all parties involved. While other factors might lead to a termination, mutual agreement is the most straightforward and common way to legally conclude an escrow without dispute.

Question 16: Which isn't true of a tenancy in common?

Interests may be unequal
On their death, a tenant in common may not leave their interest in the property to others. (Correct answer)
A part of the property does not belong to the owner.
Without the permission of the other tenants, an individual owner can sell their interest.

Correct answer: On their death, a tenant in common may not leave their interest in the property to others.

Tenancy in common is a form of co-ownership where each owner holds an undivided interest in the property, and these interests can be unequal. A defining characteristic is that there is no right of survivorship; upon the death of a tenant in common, their interest does not automatically pass to the other co-tenants but instead passes to their heirs or beneficiaries as specified in their will. Therefore, the statement that they cannot leave their interest to others is incorrect.

Question 17: An escrow agent opened a preliminary title report order for the sale of a property on April 1, 2020. The seller bought the house in 1998 with the help of a Federal Housing Administration (FHA) loan, which they are still paying down. On April 5, 2020, a preliminary title report will ____.

show title vested within the buyer’s name.
show a trust deed with the seller as the trustor (Correct answer)
include the same information as a future standard title insurance policy issued at escrow's conclusion.
obligate the title company to obtain insurance in the amount of the purchase price.

Correct answer: show a trust deed with the seller as the trustor

A preliminary title report provides a snapshot of the current status of a property's title, including any existing liens or encumbrances. Since the seller purchased the house with an FHA loan in 1998 and is still making payments, there would be an active trust deed recorded against the property. In this arrangement, the seller (borrower) is identified as the trustor, indicating an outstanding loan secured by the property.

Question 18: A ____ doesn't need to be recorded.

notification of completion
default notification (NOD)
declaration of homestead
deed of grant (Correct answer)

Correct answer: deed of grant

While recording a deed of grant is highly recommended to provide constructive notice of ownership and protect the grantee's interest against subsequent claims, it is not legally required for the deed to be valid and transfer title. A deed becomes effective upon proper delivery and acceptance. Other documents like a notice of completion, default notification, or declaration of homestead, however, must be recorded to be legally effective or to provide proper public notice.

Question 19: Which of the following amounts for documented transfer tax stamps is incorrect?

100.00
250.00
111.00 (Correct answer)
200.00

Correct answer: 111.00

Documentary transfer tax is typically calculated based on a specific rate per increment of value (e.g., $0.55 per $500 or $1.10 per $1,000 in many jurisdictions). This means the total tax amount should always be an exact multiple of the base tax unit (e.g., $0.55). An amount like $111.00 is not an exact multiple of $0.55 or $1.10, making it an unlikely or incorrect total for documented transfer tax stamps under standard calculation methods.

Question 20: An occupant must show ____ in order to establish adverse possession title.

They've had the property for at least two years and have been in possession of it continuously and uninterruptedly.
They are occupying the property in accordance with the owner's title.
They have paid all taxes due on the property during their occupancy. (Correct answer)
They have occupied the property without giving the record owner any notice.

Correct answer: They have paid all taxes due on the property during their occupancy.

To establish title through adverse possession, an occupant must meet several strict legal requirements, which vary by jurisdiction. In many states, including California, a crucial condition is that the adverse possessor must have paid all property taxes levied against the property during the entire statutory period of their continuous and uninterrupted occupancy. This demonstrates a clear claim of ownership and financial responsibility.

Question 21: The ____ is the instrument that is used to transfer title to personal property.

The bill of sale (Correct answer)
agreement on security
Deed of quitclaim
Deed of chattel.

Correct answer: The bill of sale

A bill of sale is the standard legal document used to transfer ownership of personal property, also known as chattels, from one party to another. Unlike deeds, which are used for real property, a bill of sale provides evidence of the transfer of title for movable items. A security agreement, conversely, is used to create a lien on personal property, not to transfer ownership outright.

Question 22: In a _, implied warranties are not included.

Deed of gift
grant deed.
Deed of quitclaim (Correct answer)
Deed of warranty

Correct answer: Deed of quitclaim

A quitclaim deed transfers only whatever interest the grantor currently has in the property, without offering any warranties or guarantees regarding the title's validity or completeness. This means it explicitly does not include implied warranties, such as the grantor having good title or the legal right to convey it. In contrast, grant deeds and warranty deeds typically provide certain assurances or guarantees about the title.

Question 23: An offer was made and accepted on the basis of assuming a $300,000 loan. It was revealed during escrow that the loan was for $290,000 rather than $300,000. Which outcome is the most likely?

The seller must lower the price by 10,000.
The contract can be canceled by the buyer. (Correct answer)
The seller must accept the $10,000 buyer's note.
The buyer will be required to pay an additional $10,000 in cash.

Correct answer: The contract can be canceled by the buyer.

A writ of execution is a court order issued to enforce a judgment, typically a monetary one. It directs a law enforcement officer, such as a sheriff, to seize and sell the debtor's property to satisfy the outstanding debt. This legal process culminates in a sheriff's sale, where the property is auctioned off to pay the judgment creditor.

Question 24: For a (n) _, a writ of execution is issued.

Adverse possession transfer
sheriff’s sale. (Correct answer)
Sale by a trustee.
attachment

Correct answer: sheriff’s sale.

A real estate contract is formed based on the specific terms of the offer and acceptance. If a material term, such as the assumed loan amount, is found to be significantly different from what was agreed upon, it constitutes a failure to meet a contractual condition. This material discrepancy typically gives the buyer the legal right to cancel the contract without penalty, as the agreed-upon terms cannot be fulfilled.

Question 25: A land contract differs from a grant deed transfer in the ____.

purchase price designation
interest conveyed.
principal parties' signatures
All of the above. (Correct answer)

Correct answer: All of the above.

A land contract (or installment sale contract) differs significantly from a grant deed transfer in several fundamental aspects. In a land contract, the seller retains legal title until the full purchase price is paid, conveying only equitable title to the buyer, which impacts the 'interest conveyed.' This also affects how the 'purchase price designation' is handled (paid over time) and the nature of the 'principal parties' signatures (an agreement vs. a direct conveyance). Therefore, all these elements differ.

Real Estate License Practice Test – Transfer of Property 1

Miguel recorded a grant deed to Tom.
Miguel afterward changed his mind and attempted to cancel the delivery, saying there had
been no delivery to Tom.
Why did Miguel's attempt fail?