Practice: Chapter 14 • Real Estate Taxation Issues

Front 1

ad valorem means “according to __".

Back 1

value

Front 2

Prop taxes:
first install due: Nov __
delinquent on: Dec __
becomes lien: Jan __
2nd install due: Feb __
delinquent on: Apr __
book sale on: Jun __

Back 2

1
10
1
1
10
30

Front 3

Avoid unpleasant
encounters by explaining to buyers that some time after escrow closes, they will get at least one __ tax bill in the mail.

Back 3

supplemental

Front 4

If the newly assessed value is
higher than the previous one, the tax assessment is higher and
the difference in the tax owed is assessed dating back to the sale or completion date. This “added” tax is billed to the new __ via a supplemental tax bill.

Back 4

owner

Front 5

Supplemental tax bill: the taxes paid by the new buyer may be too low since the home is worth more now than its previous taxable __.

Back 5

value

Front 6

For special assessment purposes, the land and
building(s) are usually appraised __.

Back 6

separately

Front 7

Prop 13: maximum tax rate of 1 percent, which is also called
the basic __. additional taxes may be levied, up to an
additional 1 percent and added to the basic levy. the tax may be increased
by up to 2 percent per year as long as the increase does not exceed
the Consumer __ Index (CPI) increase. Revocable living trusts, cosigners for loan qualification purposes,
and transfers between married couples, are exempt from __.

Back 7

levy; Price; reassessment

Front 8

Proposition 58 provides that transfers of real property between
spouses and transfers of the principal residence and the first
$1,000,000 of other real property between parent and child are
exempt from reassessment. Prop 193 added transfers from grandparents to __ __.

Back 8

grand kids

Front 9

Proposition 60 provides that qualified homeowners aged fifty-five
or over and taxpayers who are severely and permanently disabled
may transfer the current base year value of their present principal
residence to a replacement residence if: Both properties are in the same county, must be 55 (or one spouse must be) and reside in property, replacement property must be purchased or newly constructed after 1986, If the replacement dwelling is purchased prior to the sale of the
original property, the purchase price of the replacement residence
must be equal to or less than the value of the original
dwelling, if sold within one year after replacement purchace then it must be less than __% the original's value, if sold within one year after replacement purchace then it must be less than __% the original's value, can only do this __,

Back 9

105
110
once

Front 10

Prop 90 extends prop 60 to include replacements in other __.

Back 10

counties

Front 11

Each residential property that is owner-occupied on the lien date
of March 1 receives an annual tax homeowner’s __ of
$7,000 from the “__cash value” of the property.

Back 11

exemption; full

Front 12

California war veterans may receive a $4,000 exemption on the full
cash value assessment of their homes, but not if they are already getting the $7000 exemption. Only one exemption at a __ is allowed.

Back 12

time

Front 13

Senior Citizen Property Tax Postponement Act: those over 62 can postpone taxes until they __. It was suspended.

Back 13

sell

Front 14

Any advice you give must be immediately followed by a __
statement, signed by the client, stating that she has not relied on
any tax or legal advice that you have given.

Back 14

written

Front 15

Short-term capital gains and losses are netted, long-term capital
gains and losses are netted, and then long- and short-term
gains and losses are netted against __ __.

Back 15

each other

Front 16

Adjusted net capital gain is taxed at a maximum rate of 15 percent.
Starting in 2008, taxpayers in the 15 percent or less tax
brackets pay __ long-term capital gain tax.

Back 16

no

Front 17

Gain realized through depreciation recapture is taxed at a maximum
rate of __ percent. Depreciation is not allowed on a primary
residence and reduces sharply for taxpayers with an
adjusted gross income of $100,000 or more.

Back 17

25

Front 18

For taxes, even Motor homes, Houseboats, and Trailers can count as __ residences. But NOT land by itself.

Back 18

principle

Front 19

A seller of a personal residence who has owned
and used the home as a principal residence for at least two of the
__ years immediately before the sale can exclude from taxation up
to $250,000 of gain ($500,000 for married couples or joint filers). The exclusion can be used only once every __ months.

Back 19

five
24

Front 20

Buyers expenses:
- Itemized deductions: tax deductible stuff like prop tax and loan points
- Stuff that adds to the purchase basis (escrow, pest)
- neither a tax write-off nor a buying __ (impounds, insurance)

Back 20

expense

Front 21

If the owners provide labor to
help build the structure or other improvements, but do not actually
pay themselves a fee for doing so, their labor is __ tax deductible.

Back 21

not

Front 22

A taxpayer who inherits a home receives it with a “stepped-up”
basis equal to the Fair Market Value (FMV) at the time of the decedent’s __.

Back 22

death

Front 23

All investment or business property must
use the straight-line method of depreciation, which is generally __ years for residential property and __
years for nonresidential property.

Back 23

27-1/2, 39

Front 24

Original basis = purchase price + acquisition expenses

Depreciable basis = original basis - land value

Depreciable basis = original basis * percentage improvements to __

Back 24

land

Front 25

The methods of determining the percentage of improvements
to land are

- contract method:
buyer and seller decide on the reasonable "arm's length" value of the
land and improvements in the purchase contract

- appraisal method:
should be combined with the __
value method to determine which one provides the taxpayer
with the higher original improvements basis for depreciation
purposes.

Back 25

assessed

Front 26

The adjusted basis is used as a basis for calculating __ capital
gain tax on the sale of all real estate.

Back 26

net

Front 27

Basis by gift is the gift giver’s (donor’s) adjusted basis plus the
gift tax paid, not to exceed the Fair Market Value (__) of
the property at the time it was gifted.

Back 27

FMV

Front 28

Adjusted COST basis =
Acquisition expenses (nonrecurring legal, appraisal) + Capital improvements (new roof, etc) - Depreciation

Total Capital __ =
Sale Price - Sale costs - Adjusted Cost Basis

Back 28

Gain

Front 29

To compute depreciation:
[Original Basis (Purchase price + nonrecurring costs) - Land value] * tabulated __

Back 29

percentage

Front 30

Capital gains depreciation recapture is now taxed at __ percent.

Back 30

25

Front 31

A tax-deferred exchange, or 1031 exchange, allows you to postpone paying taxes when you one property for __. Its really equivalent to a taxdeferred
loan from the government and gives the owner more
money to invest in other __.

Back 31

another
property

Front 32

Although an intermediary (in a 1031 exchange) acts much like an escrow, it is not
__ an escrow.

Back 32

necessarily

Front 33

The equal-or-up-rule applies to doing 1031 exchanges and avoids paying taxes on __. It means you have to trade up to an equal or better property.

Back 33

boot

Front 34

Property may be held by four separate entities: individuals, partnerships,
__, and Limited Liability Companies (LLCs). The __ rule essentially states that the way a party holds title to
property going into an exchange is the way the party must hold
property coming out of an exchange.

Back 34

corporations
entity

Front 35

The investment property rule states in general that no gain or loss shall be recognized on
the exchange of property held for productive use in a trade or business
or for investment if such property is exchanged solely for
property of like kind that is to be held either for productive use
in a trade or business or for investment. This precludes tax deferment
for the trade of a personal residence for business or investment
property as they do not meet the __-kind rule. To
meet the investment property rule, a property must be held for about two to three years to show the intent of __ .

Back 35

like
investing

Front 36

The __ rule says an
exchanger who qualifies for a 1031 tax-deferred exchange cannot
recognize the gain or loss.

Back 36

no-choice

Front 37

The __ rule states that if a real
estate transaction qualifies as a tax-deferred exchange, a loss cannot
be recognized and losses must be deferred along with gains.

Back 37

no loss

Front 38

The ___ rule says that property shall be treated as not like-kind if:
- they take more than 45 days to ID the property to be exchanged. Or...
- More than __ days to close escrow on new property

Back 38

180

Front 39

To analyze a 1031 exchange:
1. calculate the capital gain
2. balance equities to see who will pay boot to whom
3. Determine the recognized gain (the gain that will actually
be taxed)
4. Determine the new __ basis (for pros only)

Back 39

depreciable

Front 40

The use of an installment sale allows the investor to spread
the taxable gain over several __.

Back 40

years

Front 41

Installment sale: The seller does not pay the entire tax until after receiving the
entire __price.

Back 41

sales

Front 42

Installment sale: All depreciation recapture income is recognized in the year of __. Also, this all happens automatically.

Back 42

sale

Front 43

Installment sale: Because of our progressive tax system, where higher income is
taxed at higher rates, spreading the gain over a number of years
could mean that the gain would be taxed at a __ rate.

Back 43

lower

Front 44

Sale-leaseback: By selling and becoming a lessee, the former owner
can usually write off all lease payments as an operating expense
while enjoying the use of 100 percent of the cash proceeds that used to be __ in the property.

Back 44

equity

Front 45

A person who has equitable ownership of the property is
considered the lawful recipient of any available __ benefits.

Back 45

tax

Front 46

The Taxpayer Relief Act of 1997: Only interest paid on a person’s primary residence
or second home is __ as mortgage interest.

Back 46

deductible

Front 47

Remember: only the first 2 homes and the first 1,000,000 in loans have deductible __.

Back 47

interest

Front 48

Equity indebtedness refers to loans made using the home as
security for purposes other than purchase or home improvement (HELOCs, I think). If its not acquisition indebtedness , its __ indebtedness .

Back 48

equity

Front 49

points incurred when refinancing must be tax __ over the
life of the loan.

Back 49

deducted

Front 50

Realized gain is simply your profit on selling a home. __ gain is the part of realized gain that's taxable.

Back 50

recognized

Front 51

Adjusted basis = original basis + home improvements

So homeowners should keep a good record to reduce their tax liability when they __. These same items are deductible in the same year if you have a rental.

Back 51

sell

Front 52

If
a taxpayer’s failure to meet the provision is a result of the home
being sold due to a change of the place of employment, health
status, or other unforeseen circumstances, he might get an exclusion from the two year rule.

Back 52

whatever

Front 53

Taxpayers with an adjusted gross income of less than $100,000
can use real estate losses (which are considered passive losses) to
shelter up to $25,000 of their active income. Taxpayers will see
their eligibility for passive losses rapidly decrease as their adjusted
gross income __ $100,000.

Back 53

exceeds

Front 54

Because investors have no management
responsibilities in investments such as limited partnerships
and triple net leased properties , the investor
cannot use such losses as __ write offs.

Back 54

tax

Front 55

FIRPTA generally requires that a buyer withhold estimated taxes
equal to 10 percent of the sale price. Cal-FIRPTA requires __% of the sale price.

Back 55

3.5%

Front 56

There is a prop tax veteran’s exemption of the first $100,000 for totally __
veterans.

Back 56

disabled

Front 57

Depreciation is a noncash expense for tax purposes
that applies to the improvements of income, business, and is considered a return of the investment,
whereas cash flow is considered a return __ the investment.

Back 57

on

Front 58

A 1031 delayed tax-deferred exchange is possible if the taxpayer
identifies the “new” property within 45 days after transferring
the “old” one and closes escrow on the new one within
__ days.

Back 58

180

Front 59

Residential property owners may deduct the acquisition
indebtedness interest on a first loan of up to $1,000,000 for
primary and secondary residences (combined), as well as the
interest on secondary financing equity indebtedness loans up to $__.

Back 59

100,000

Front 60

Capital gains have a tax rate of 15 percent for long term (over
one year), whereas capital gains on property sold within a year after
acquisition are taxed at __ income rates. Depreciation

Back 60

ordinary

Front 61

7. A homeowner has a first loan of
$300,000 at 6 percent interest and a
second loan taken out after she acquired
the property of $130,000 at
7.5 percent interest.What is the total
amount of interest that can be written
off on her income tax in a tax year?
A. $27,750
B. $25,500
C. $25,800
D. None of the above

Back 61

B. $25,500 because you can only deduct interest on $100,000 of the second loan.

Front 62

A homeowner paid $200,000 for her
home and paid $6,000 in nonrecurring
acquisition costs. Over the years
she has installed an outside wall
($3,000), replaced the roof ($5,000),
added a bath ($12,000), and installed
new carpets and drapes ($3,500).
What is her current basis in her home?
A. $226,000
B. $206,000
C. $212,000
D. $229,500

Back 62

A. $226,000 ("current" means "original basis", not "adjusted basis". Trick question.