rep ch 13

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rep ch 13
2011-12-12 23:43:49
rep 13

rep ch 13
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  1. 1. Judy owns an apartment building worth $800,000. The building's adjusted cost basis is $770,000 and it has an outstanding $720,000 mortgage. She enters into an exchange with Bruce, who owns a shopping center worth $785,000. The shopping center is mortgaged for $700,000. Bruce also pays Judy $10,000 cash boot. What are Judy's actual and deferred gain?
    A. $45,000 and $15,000
    B. $70,000 and $15,000
    C. $30,000 and $10,000
    D. $30,000 and $20,000
    • Question #1
    • Answer: A
    • Explanation: Judy's actual capital gain is the gain on the sale of her building. She received a shopping center worth $785,000, plus $10,000 cash and $20,000 in mortgage relief, totaling $815,000. Since her cost basis apartment building is $770,000, her realized (actual) gain is $45,000. Of that, $30,000 is not like-kind property and is thus subject to tax. The remaining $15,000 is deferred gain.
  2. 2. Which of the following could result in a tax advantage?
    A. A tax-free exchange
    B. An installment sale
    C. A depreciation deduction
    D. All of the above
    • Question #2
    • Answer: D
    • Explanation: Any of the above options could provide a federal income tax advantage.
  3. 3. Adam is holding a piece of unimproved property as an investment. Which of the following is he entitled to deduct for income tax purposes?
    A. Annual appreciation in the land's value
    B. A loss on the sale of the property
    C. A gain on the sale of the property
    D. None of the above
    • Question #3
    • Answer: B
    • Explanation: If he loses money when he sells the property, he has suffered a capital loss. A capital loss on property held for investment purposes is tax-deductible.
  4. 4. Which of the following properties could be depreciated for income tax purposes?
    A. An owner-occupied farmhouse
    B. A commercial apple orchard
    C. Vacant land
    D. Any of the above
    • Question #4
    • Answer: B
    • Explanation: As property used in a trade or business, a commercial apple orchard could be depreciated for income tax purposes.
  5. 5. Depreciation on real property means that:
    A. the property becomes virtually worthless
    B. the property's value increases
    C. the basis decreases
    D. the basis increases
    • Question #5
    • Answer: C
    • Explanation: Depreciation has the effect of lowering the property's cost basis.
  6. 6. James decides to sell his home. This sale may:
    A. result in a capital gain or a capital loss
    B. result in neither a capital gain nor a capital loss
    C. result in a capital gain, but not a capital loss
    D. result in a capital loss, but not a capital gain
    • Question #6
    • Answer: C
    • Explanation: A gain from the sale of a personal residence may be treated as a capital gain. A loss from the same sale, however, is not deductible.
  7. 7. The capital gain exclusion is available for married couples or individuals who lived in a principal residence for at least:
    A. 12 months
    B. 2 years
    C. 5 years
    D. 6 years
    • Question #7
    • Answer: B
    • Explanation: A capital gain exclusion is available on the sale of a principal residence if the owner(s) lived in it for at least two years.
  8. 8. Regarding tax-free exchanges, which of the following is true?
    A. An office building cannot be exchanged for an apartment complex
    B. A personal residence may be exchanged for a house of similar worth
    C. Property exchanged must be used in a trade or business or held for income or investment
    D. Both properties must carry mortgages
    • Question #8
    • Answer: C
    • Explanation: To be eligible for a tax-free exchange, a property must be used in a trade or business or held for income or investment. It must be exchanged for like-kind property.
  9. 9. To be depreciable under income tax law, a property must be:
    A. a personal residence
    B. unencumbered
    C. improved
    D. vacant
    • Question #9
    • Answer: C
    • Explanation: Vacant land does not depreciate. Therefore, depreciable real estate must have some sort of improvement or development.
  10. 10. For tax purposes, which of the following personal residence expenses may be deducted from ordinary income?
    A. Cleaning and general maintenance costs
    B. Repair costs
    C. Property taxes and mortgage interest
    D. Loss when property is sold
    • Question #10
    • Answer: C
    • Explanation: Property taxes and mortgage interest are tax-deductible.
  11. 11. For income tax purposes, a property owner living in her own home may not deduct which of the following expenses?
    A. The cost of painting a bathroom
    B. An uninsured loss from damages resulting from a kitchen fire
    C. Property taxes
    D. Mortgage interest
    • Question #11
    • Answer: A
    • Explanation: Uninsured theft or casualty losses, property taxes, and mortgage interest are all deductible expenses for an owner-occupied single-family residence. General upkeep and repair costs are not deductible.
  12. 12. In 2003, Seymour bought a home for $515,000. In 2009, he sold it for $640,000 and bought another home for $657,000. Based on this information, what is his cost basis on his new house and the recognized gain reported on his income tax return?
    A. $515,000 and $125,000
    B. $657,000 and $125,000
    C. $515,000 and none
    D. $657,000 and none
    • Question #12
    • Answer: D
    • Explanation: The cost basis on the new house is the purchase price, $657,000. Under current income tax law, up to $250,000 in gain may be excluded from tax for an individual selling a personal residence.
  13. 13. Mr. March owns a commercial property; it has an outstanding mortgage of $1,247,000. His adjusted basis in the property is $1,275,000. He exchanges the property for another commercial property that is worth $1,287,000; he assumes the outstanding mortgage, with a remaining balance of $1,243,000. In the transaction, he also receives $18,000 cash. What are Mr. March's actual gain and taxable gain?
    A. $10,000 and $4,000
    B. $34,000 and $22,000
    C. $36,000 and $18,000
    D. $30,000 and $12,000
    • Question #13
    • Answer: B
    • Explanation: The first step is to calculate what Mr. March receives in the transaction. He receives a $1,287,000 property, $18,000 cash, and $4,000 in mortgage relief ($1,247,000 old mortgage minus $1,243,000 new mortgage = $4,000). He receives $1,309,000 ($1,287,000 + $18,000 + $4,000). Subtract from that amount the adjusted basis in the building he gave up to calculate his actual gain ($1,309,000 - $1,275,000 = $34,000). To calculate his taxable gain, all you need to remember is that only the boot (the cash and mortgage relief) is taxable. Add them together to calculate the recognized (or taxable) gain ($18,000 + $4,000 = $22,000).
  14. 14. A condominium owner living in his condominium is permitted to deduct which of the following expenses on his federal income tax return?
    A. Repair and upkeep of his individual unit
    B. Interest paid on a loan secured by the common areas
    C. Monthly payment toward upkeep of the common areas
    D. None of the above
    • Question #14
    • Answer: B
    • Explanation: He may deduct his share of the interest paid on a mortgage of the common areas. Individual unit maintenance and repair costs are not deductible and neither are assessments for upkeep of common areas.
  15. 15. An owner of an apartment complex reports income on a cash basis. Which of the following is not tax-deductible?
    A. Mortgage interest
    B. Lost income from vacancies
    C. Cleaning and maintenance costs
    D. Improvement and redecorating costs
    • Question #15
    • Answer: B
    • Explanation: Lost income from vacancies is simply not reported as income. The other expenses are tax-deductible.