Legal and Tax Implications Flashcards
7 cards from real Real Estate Investing practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Legal and Tax Implications flashcards as text
What is the primary tax advantage of a 1031 exchange in real estate?
Answer: Defers capital gains tax when reinvesting in like-kind property
A 1031 exchange allows investors to defer capital gains taxes by reinvesting proceeds into a like-kind property.
Under a tenancy in common (TIC) arrangement, what happens to a co-owner's share upon their death?
Answer: It passes to the deceased owner's heirs or estate
In a TIC, each owner's share passes to their heirs through their estate, unlike joint tenancy where the right of survivorship applies.
Which IRS tax form is used to report rental income and expenses for a residential rental property?
Answer: Schedule E
Schedule E (Supplemental Income and Loss) is used to report rental income, expenses, and depreciation for residential rental properties.
What is the maximum annual passive activity loss a real estate professional can deduct against ordinary income?
Answer: Unlimited, with no income ceiling
Qualifying real estate professionals can deduct unlimited rental losses against ordinary income, provided they meet IRS material participation tests.
A 'due-on-sale' clause in a mortgage requires that:
Answer: The full loan balance becomes due if the property is transferred
A due-on-sale clause accelerates the mortgage, making the full balance payable when the property is sold or transferred to a new owner.
Which legal entity structure provides 'pass-through' taxation and limits personal liability for real estate investors?
Answer: Limited Liability Company (LLC)
An LLC provides pass-through taxation (avoiding double taxation) and shields members from personal liability for business debts.
What is 'depreciation recapture' in real estate taxation?
Answer: Taxing previously claimed depreciation deductions when a property is sold
When a depreciated property is sold, the IRS taxes the previously deducted depreciation at a maximum rate of 25% under Section 1250 recapture rules.