Real Estate Tax Strategies Flashcards

For a taxpayer with AGI of $130,000, what amount of the $25,000 passive rental real estate loss special allowance is still available under IRC Section 469(i)?

Answer: $10,000

The $25,000 allowance phases out at 50 cents per dollar of AGI above $100,000; at $130,000 AGI, $30,000 × 50% = $15,000 is phased out, leaving $25,000 − $15,000 = $10,000 available.

What entity structure is most commonly recommended to hold investment real estate to achieve both liability protection and pass-through taxation for a tax coaching client?

Answer: Limited Liability Company (LLC) taxed as a partnership

An LLC taxed as a partnership provides personal liability protection while allowing rental income, losses, and depreciation to pass through directly to the owners' individual tax returns without double taxation.

What is the primary tax disadvantage for a taxpayer classified as a 'dealer in real estate' rather than an 'investor'?

Answer: Gains are taxed as ordinary income and subject to self-employment tax rather than at capital gains rates

Real estate dealers hold property primarily for sale to customers in the ordinary course of business, so gains are ordinary income subject to self-employment taxes, rather than the preferential long-term capital gains rates available to investors.

When calculating the adjusted basis of a rental property, which of the following correctly increases the owner's basis?

Answer: Capital improvements added to the property

Capital improvements (e.g., new roof, addition, HVAC system) permanently add to the property's adjusted basis, whereas depreciation, casualty losses, and insurance reimbursements reduce basis.

Under IRC Section 469, what does the 'grouping election' allow real estate investors to do?

Answer: Treat multiple rental activities as a single activity to more easily meet material participation tests

The grouping election under Treas. Reg. 1.469-4 allows taxpayers to combine multiple activities into a single activity, making it easier to meet the 500-hour or 750-hour material participation tests and potentially convert passive losses to active.

What tax planning strategy involves a property owner selling a property below its appraised value to a family member and claiming a gift for the difference?

Answer: Bargain sale

A bargain sale involves selling property for less than fair market value, with the difference treated as a gift; the seller recognizes gain on the sale portion and may owe gift tax on the gifted portion, requiring careful basis allocation.

What is the primary purpose of a Delaware Statutory Trust (DST) in a 1031 exchange tax strategy?

Answer: To allow investors to acquire fractional interests in institutional-grade real estate as replacement property in a 1031 exchange

A Delaware Statutory Trust allows investors who cannot identify suitable replacement property in time to acquire a fractional beneficial interest in a large professionally managed property, qualifying as like-kind replacement property for 1031 exchange purposes.