CTC Real Estate Tax Strategies 1 — Questions and Answers
Question 1: Under IRC Section 1031, what type of property exchange allows a taxpayer to defer capital gains tax?
- Like-kind exchange of investment or business property (Correct answer)
- Exchange of personal-use property for investment property
- Sale and reinvestment of any real estate within 60 days
- Exchange of a primary residence for a rental property
Correct answer: Like-kind exchange of investment or business property
IRC Section 1031 allows deferral of capital gains when taxpayers exchange investment or business property for property of a like-kind, provided specific identification and timeline rules are met.
Question 2: What is the straight-line depreciation recovery period for residential rental property under MACRS?
- 27.5 years (Correct answer)
- 39 years
- 25 years
- 31.5 years
Correct answer: 27.5 years
Residential rental property is depreciated over 27.5 years using the straight-line method under MACRS, while commercial real property uses 39 years.
Question 3: Under the passive activity loss rules of IRC Section 469, what is the maximum rental real estate loss a taxpayer may deduct annually if AGI does not exceed $100,000?
- $25,000 (Correct answer)
- $50,000
- $10,000
- $15,000
Correct answer: $25,000
IRC Section 469(i) provides a $25,000 special allowance for rental real estate losses for taxpayers who actively participate and whose AGI does not exceed $100,000.
Question 4: What is the annual depreciation period for commercial (nonresidential) real property under MACRS?
- 39 years (Correct answer)
- 27.5 years
- 40 years
- 31.5 years
Correct answer: 39 years
Nonresidential commercial real property placed in service after May 12, 1993 is depreciated straight-line over 39 years under MACRS.
Question 5: To qualify as a 'real estate professional' under IRC Section 469(c)(7) and avoid passive loss limitations, how many hours per year must a taxpayer spend in real property trades or businesses?
- More than 750 hours (Correct answer)
- More than 500 hours
- More than 1,000 hours
- More than 1,500 hours
Correct answer: More than 750 hours
IRC Section 469(c)(7) requires more than 750 hours per year in real property trades or businesses in which the taxpayer materially participates, and this must exceed time spent in any other trade or business.
Question 6: What rate does the Net Investment Income Tax (NIIT) impose on passive rental income for high-income taxpayers?
- 3.8% (Correct answer)
- 2.9%
- 5.0%
- 1.45%
Correct answer: 3.8%
The NIIT imposes a 3.8% surtax on the lesser of net investment income (including passive rental income) or the excess of MAGI over the applicable threshold ($200,000 single / $250,000 MFJ).
Question 7: Which tax strategy involves reclassifying a building's components into shorter depreciation lives to accelerate deductions?
- Cost segregation study (Correct answer)
- Bonus depreciation election
- Section 179 expensing
- Accelerated MACRS method
Correct answer: Cost segregation study
A cost segregation study identifies and reclassifies building components (e.g., electrical, plumbing, land improvements) from 39-year or 27.5-year property into 5-, 7-, or 15-year MACRS property, accelerating depreciation deductions.
CTC Real Estate Tax Strategies 1
Under IRC Section 1031, what type of property exchange allows a taxpayer to defer capital gains tax?