Real Estate Investing Real Estate Investing Real Estate Taxation Questions and Answers 3 β Questions and Answers
Question 1: Which entity structure allows real estate income to pass through to investors while providing liability protection, and is the most common for rental properties?
- Limited Liability Company (LLC) (Correct answer)
- C Corporation
- Real Estate Investment Trust (REIT)
- General Partnership
Correct answer: Limited Liability Company (LLC)
LLCs provide pass-through taxation and liability protection, making them the most popular entity choice for holding rental real estate.
Question 2: What is the Net Investment Income Tax (NIIT) rate that may apply to rental income for high-income taxpayers?
- 3.8% (Correct answer)
- 2.5%
- 5.0%
- 1.45%
Correct answer: 3.8%
The NIIT imposes an additional 3.8% tax on net investment income, including rental income, for individuals exceeding certain AGI thresholds.
Question 3: When an investor sells a property held for more than one year, long-term capital gains are taxed at which maximum federal rate for the highest earners?
- 20% (Correct answer)
- 15%
- 25%
- 28%
Correct answer: 20%
The maximum federal long-term capital gains tax rate is 20% for taxpayers in the highest income bracket.
Question 4: What does the IRS require a real estate professional to demonstrate to deduct unlimited rental losses against other income?
- 750 hours and more than half of personal services in real property trades or businesses (Correct answer)
- 500 hours in any trade or business
- Ownership of at least 10 rental properties
- A real estate license in their state of residence
Correct answer: 750 hours and more than half of personal services in real property trades or businesses
To qualify as a real estate professional, a taxpayer must spend at least 750 hours and more than 50% of their personal service hours in real property trades or businesses.
Question 5: Which provision allows small landlords to deduct up to 20% of qualified business income from pass-through rental activities?
- Section 199A deduction (Correct answer)
- Section 1031 exchange
- Section 121 exclusion
- Section 179 deduction
Correct answer: Section 199A deduction
The Section 199A qualified business income deduction allows eligible taxpayers to deduct up to 20% of net rental income from pass-through entities.
Question 6: How does a stepped-up basis at death benefit heirs who inherit investment real estate?
- The property's basis resets to fair market value, eliminating accumulated depreciation recapture (Correct answer)
- All future rental income becomes tax-exempt
- Property taxes are frozen at the decedent's rate
- The heir receives a 10-year exemption from capital gains tax
Correct answer: The property's basis resets to fair market value, eliminating accumulated depreciation recapture
A stepped-up basis resets the property's cost basis to its current fair market value at the date of death, wiping out all prior depreciation and unrealized gains.
Real Estate Investing Real Estate Investing Real Estate Taxation Questions and Answers 3
Which entity structure allows real estate income to pass through to investors while providing liability protection, and is the most common for rental properties?