Real Estate Investing Real Estate Investing Tax Implications of Ownership Questions and Answers 2 — Questions and Answers
Question 1: What is the maximum annual passive activity loss deduction allowed for active participants in rental real estate under the special allowance rule?
- $15,000
- $25,000 (Correct answer)
- $50,000
- $100,000
Correct answer: $25,000
Active participants in rental real estate can deduct up to $25,000 in passive activity losses against non-passive income, subject to income phase-outs.
Question 2: When a property owner dies and passes real estate to heirs, the tax basis of the property is adjusted to what value?
- Original purchase price
- Adjusted cost basis at death
- Fair market value at date of death (Correct answer)
- Average of purchase price and fair market value
Correct answer: Fair market value at date of death
Inherited real estate receives a stepped-up basis to the fair market value at the date of the decedent's death, potentially eliminating years of capital gains.
Question 3: Which IRS form is used to report rental real estate income and expenses?
- Schedule A
- Schedule C
- Schedule D
- Schedule E (Correct answer)
Correct answer: Schedule E
Schedule E (Supplemental Income and Loss) is used to report income and expenses from rental real estate activities.
Question 4: What is the depreciation recapture tax rate applied when selling a rental property that has been depreciated?
- 10%
- 15%
- 25% (Correct answer)
- 28%
Correct answer: 25%
Depreciation recapture on real property is taxed at a maximum rate of 25% under Section 1250 rules, applied to the amount of depreciation previously claimed.
Question 5: In a tenancy in common (TIC) arrangement, how is rental income typically reported for tax purposes?
- Only one owner reports all income
- Each owner reports their proportional share on their own return (Correct answer)
- The TIC entity files a partnership return
- Income is tax-exempt until the property is sold
Correct answer: Each owner reports their proportional share on their own return
In a TIC arrangement, each co-owner reports their proportional share of rental income and expenses on their individual tax returns.
Question 6: What is the net investment income tax (NIIT) rate that may apply to rental income for high-income taxpayers?
- 1.5%
- 2.9%
- 3.8% (Correct answer)
- 5.0%
Correct answer: 3.8%
The 3.8% net investment income tax applies to rental income for individuals with modified adjusted gross income exceeding $200,000 (single) or $250,000 (married filing jointly).
Real Estate Investing Real Estate Investing Tax Implications of Ownership Questions and Answers 2
What is the maximum annual passive activity loss deduction allowed for active participants in rental real estate under the special allowance rule?