REA Real Estate Taxation & Accounting 1 — Questions and Answers
Question 1: Under MACRS, the depreciation period for residential rental real property is:
- 15 years using accelerated methods
- 27.5 years using straight-line method (Correct answer)
- 39 years using straight-line method
- 40 years using double-declining balance
Correct answer: 27.5 years using straight-line method
Under MACRS, residential rental property uses a 27.5-year straight-line depreciation period, which is shorter than the 39-year period for commercial real property.
Question 2: In a Section 1031 like-kind exchange, the taxpayer's primary tax benefit is:
- Permanently eliminating capital gains taxes on the relinquished property
- Converting passive losses into active income deductions
- Deferring capital gains taxes by reinvesting proceeds into replacement property (Correct answer)
- Receiving a stepped-up basis equal to fair market value upon exchange
Correct answer: Deferring capital gains taxes by reinvesting proceeds into replacement property
A 1031 exchange defers—not permanently eliminates—capital gains recognition, provided the investor reinvests proceeds in qualifying like-kind property within required timeframes.
Question 3: In a Section 1031 exchange, 'boot' is best defined as:
- Non-like-kind property or cash received by the taxpayer that may trigger taxable gain (Correct answer)
- The depreciated basis transferred from the relinquished property to the replacement property
- Additional mortgage debt assumed on the replacement property above the relinquished loan
- The 45-day identification period allowed to locate a replacement property
Correct answer: Non-like-kind property or cash received by the taxpayer that may trigger taxable gain
Boot is any non-like-kind property or cash received in the exchange; its receipt triggers taxable gain to the extent of the lesser of boot received or total realized gain.
Question 4: Passive activity loss rules under IRC Section 469 generally require that:
- All rental income is fully exempt from self-employment taxation
- Real estate losses may freely offset W-2 earned income without limitation
- Rental losses can only offset other passive income, subject to limited exceptions (Correct answer)
- Passive losses are permanently disallowed and may never be utilized
Correct answer: Rental losses can only offset other passive income, subject to limited exceptions
Section 469 limits passive losses to offsetting passive income; unused passive losses are suspended and released when the passive activity is fully disposed of in a taxable transaction.
Question 5: A taxpayer qualifies as a 'real estate professional' for federal tax purposes only if:
- They hold a valid state real estate broker license and report income on Schedule E
- They spend more than 750 hours per year in real property activities AND this exceeds 50% of their total personal services (Correct answer)
- They own more than 10 rental properties generating positive cash flow
- Their rental income exceeds their W-2 earned income for the tax year
Correct answer: They spend more than 750 hours per year in real property activities AND this exceeds 50% of their total personal services
To qualify under IRC §469(c)(7), the taxpayer must perform more than 750 hours of services in real property trades/businesses AND this must represent more than half of their total personal services for the year.
Question 6: Long-term capital gains on the sale of investment real estate held more than one year are taxed at:
- Ordinary income tax rates up to 37%
- A flat rate of 28% regardless of income level
- Preferential rates of 0%, 15%, or 20% based on the taxpayer's taxable income (Correct answer)
- The same marginal rate as short-term gains in the year of sale
Correct answer: Preferential rates of 0%, 15%, or 20% based on the taxpayer's taxable income
Long-term capital gains rates of 0%, 15%, or 20% apply based on the taxpayer's taxable income bracket, which are significantly lower than ordinary income rates.
Question 7: The $25,000 special allowance for rental real estate losses is available to active participants whose modified adjusted gross income (MAGI) is:
- Below $200,000, phasing out completely at $250,000
- Below $100,000, phasing out ratably to zero at $150,000 (Correct answer)
- Below $75,000 with no phase-out for real estate professionals
- Below $150,000 with a flat 50% reduction above that threshold
Correct answer: Below $100,000, phasing out ratably to zero at $150,000
Active participants in rental activities may deduct up to $25,000 of rental losses against non-passive income, but this allowance phases out ratably between MAGI of $100,000 and $150,000.
REA Real Estate Taxation & Accounting 1
Under MACRS, the depreciation period for residential rental real property is: