FREE Real Estate Investing Legal and Tax Implications Questions and Answers

Question 1

Under the Modified Accelerated Cost Recovery System (MACRS), what is the standard depreciable life for a residential rental property in the United States?

Accepted Answer

27.5 years

Answer

The IRS specifies a recovery period of 27.5 years for residential rental properties, which allows investors to deduct a portion of the property's cost basis each year. Non-residential (commercial) property has a 39-year recovery period.

Question 2

An investor sells an apartment building on June 1st and intends to perform a 1031 'like-kind' exchange to defer capital gains taxes. What are the two critical deadlines the investor must meet, measured from the date of the sale?

Accepted Answer

Identify a replacement property within 45 days and close within 180 days.

Answer

To successfully execute a 1031 exchange, the investor must identify potential replacement properties in writing within 45 calendar days of closing the sale of the relinquished property. They must then acquire the replacement property within 180 calendar days of the original sale.

Question 3

Which of the following is a primary advantage of holding real estate investments within a Limited Liability Company (LLC)?

Accepted Answer

It provides a 'corporate veil' that can protect the investor's personal assets from business liabilities.

Answer

A key reason investors use an LLC is for liability protection. If a lawsuit is filed against the property (e.g., a slip-and-fall case), the liability is generally limited to the assets owned by the LLC, protecting the investor's personal home, car, and savings.

Question 4

An investor purchases a rental property for $300,000. Over five years, they claim $50,000 in depreciation deductions. They then sell the property for $450,000. What is the investor's total capital gain for tax purposes?

Accepted Answer

$200,000

Answer

The adjusted cost basis is the original purchase price minus accumulated depreciation ($300,000 - $50,000 = $250,000). The total capital gain is the selling price minus the adjusted cost basis ($450,000 - $250,000 = $200,000). Note that $50,000 of this gain will be subject to depreciation recapture tax rates.

Question 5

According to IRS passive activity loss (PAL) rules, losses from rental real estate can typically only be used to offset what type of income?

Accepted Answer

Income from other passive activities

Answer

The passive activity loss rules generally prevent investors from using losses from passive activities, like most rental real estate, to offset income from active sources (e.g., a W-2 job) or portfolio sources (e.g., stocks and bonds). These losses can only be used to offset income from other passive activities.

Real Estate Investing Practice Test

Real Estate Investing Practice Test

FREE Real Estate Investing Legal and Tax Implications Questions and Answers