Real Estate Investing Legal and Tax Implications 2

Question 1

What is the primary tax advantage of a 1031 exchange in real estate?

Accepted Answer

Defers capital gains tax when reinvesting in like-kind property

Answer

A 1031 exchange allows investors to defer capital gains taxes by reinvesting proceeds into a like-kind property.

Question 2

Under a tenancy in common (TIC) arrangement, what happens to a co-owner's share upon their death?

Accepted Answer

It passes to the deceased owner's heirs or estate

Answer

In a TIC, each owner's share passes to their heirs through their estate, unlike joint tenancy where the right of survivorship applies.

Question 3

Which IRS tax form is used to report rental income and expenses for a residential rental property?

Accepted Answer

Schedule E

Answer

Schedule E (Supplemental Income and Loss) is used to report rental income, expenses, and depreciation for residential rental properties.

Question 4

What is the maximum annual passive activity loss a real estate professional can deduct against ordinary income?

Accepted Answer

Unlimited, with no income ceiling

Answer

Qualifying real estate professionals can deduct unlimited rental losses against ordinary income, provided they meet IRS material participation tests.

Question 5

A 'due-on-sale' clause in a mortgage requires that:

Accepted Answer

The full loan balance becomes due if the property is transferred

Answer

A due-on-sale clause accelerates the mortgage, making the full balance payable when the property is sold or transferred to a new owner.

Real Estate Investing Practice Test