Real Estate Investing Tax Implications of Ownership Questions and Answers

Question 1

According to the Modified Accelerated Cost Recovery System (MACRS), what is the standard depreciation period for a residential rental property in the United States?

Accepted Answer

27.5 years

Answer

15 years

Answer

39 years

Answer

7 years

Question 2

An investor owns a rental property and incurs several expenses. Which of the following expenditures must be capitalized and depreciated, rather than being fully deducted as a current operating expense?

Accepted Answer

Installing a new roof on the entire building.

Answer

Repainting a unit between tenants.

Answer

Replacing a single broken window.

Answer

Fixing a leaky faucet.

Question 3

An investor sells an apartment building and wants to defer capital gains taxes by executing a 1031 exchange. Which of the following actions would DISQUALIFY the transaction from tax-deferred status?

Accepted Answer

Taking possession of the sale proceeds for one week before wiring them to a qualified intermediary.

Answer

Using a qualified intermediary to hold the funds from the sale.

Answer

Exchanging the apartment building for a piece of raw land held for investment.

Answer

Identifying three potential replacement properties within 45 days of the sale.

Question 4

An investor has a modified adjusted gross income (MAGI) of $90,000 and actively participates in managing a rental property that produced a tax loss of $18,000 this year. According to the special allowance for rental real estate activities, how much of this loss can the investor deduct against their non-passive income?

Accepted Answer

$18,000, the full amount of the loss.

Answer

$0, because rental income is always passive.

Answer

$3,000, the standard capital loss limit.

Answer

$25,000, the maximum special allowance.

Question 5

An investor purchases a property for $400,000. They incur $6,000 in closing costs (e.g., legal fees, recording fees) and immediately spend $40,000 on a new HVAC system. What is the investor's adjusted cost basis in the property immediately after this work?

Accepted Answer

$446,000

Answer

$400,000

Answer

$406,000

Answer

$440,000

Question 6

Upon selling a depreciated investment property that was held for several years, a portion of the gain is subject to "depreciation recapture." What is the maximum federal tax rate applied to the recaptured amount under Section 1250?

Accepted Answer

25%

Answer

15%

Answer

20%

Answer

The investor's ordinary income tax rate.