Real Estate Investing Legal and Tax Implications 4 β Questions and Answers
Question 1: What is a 'deed in lieu of foreclosure'?
- A court order preventing foreclosure
- A voluntary transfer of property to the lender to avoid foreclosure (Correct answer)
- A partial payoff agreement with the lender
- A government program for underwater homeowners
Correct answer: A voluntary transfer of property to the lender to avoid foreclosure
In a deed in lieu of foreclosure, the borrower voluntarily transfers title to the lender to satisfy the debt and avoid a formal foreclosure proceeding.
Question 2: Which type of deed provides the LEAST protection to the buyer?
- General warranty deed
- Special warranty deed
- Bargain and sale deed
- Quitclaim deed (Correct answer)
Correct answer: Quitclaim deed
A quitclaim deed transfers only whatever interest the grantor currently holds with no warranties, offering the buyer no protection against prior claims.
Question 3: Under the Tax Cuts and Jobs Act (TCJA), the Section 199A deduction allows eligible pass-through real estate income to be deducted at what percentage?
- 10%
- 15%
- 20% (Correct answer)
- 25%
Correct answer: 20%
The Section 199A qualified business income deduction allows eligible taxpayers to deduct up to 20% of qualified real estate rental income from pass-through entities.
Question 4: What is the main purpose of title insurance in a real estate transaction?
- To insure the property against physical damage
- To protect against losses from defects in title that existed before the policy date (Correct answer)
- To guarantee the property's appraised value
- To cover the buyer if the seller defaults
Correct answer: To protect against losses from defects in title that existed before the policy date
Title insurance protects the policyholder from financial losses due to title defects, liens, or encumbrances that existed prior to the purchase.
Question 5: An investor claiming rental losses as a non-real-estate-professional with an AGI of $125,000 can deduct how much in passive losses?
- $25,000
- $12,500 (Correct answer)
- $0
- $50,000
Correct answer: $12,500
The $25,000 passive loss allowance phases out by 50 cents for each dollar above $100,000 AGI, so at $125,000 AGI, only $12,500 remains deductible.
Question 6: A real estate investor using a self-directed IRA to purchase rental property must be aware of which key restriction?
- The property must be located in the same state as the IRA custodian
- The investor cannot personally use or benefit from the property (Correct answer)
- The IRA must hold at least 5 properties
- The property must generate a minimum 8% annual return
Correct answer: The investor cannot personally use or benefit from the property
IRS prohibited transaction rules bar the IRA owner and disqualified persons from personally using, managing, or benefiting from IRA-owned real estate.
Question 7: What is an 'earnest money' deposit's legal significance in a real estate contract?
- It is automatically refundable regardless of contract terms
- It demonstrates the buyer's good faith and may be forfeited if the buyer defaults (Correct answer)
- It reduces the loan principal at closing
- It is applied to the seller's capital gains tax
Correct answer: It demonstrates the buyer's good faith and may be forfeited if the buyer defaults
Earnest money signals the buyer's serious intent and is typically held in escrow; if the buyer defaults without a contingency, the seller may keep it as liquidated damages.
Real Estate Investing Legal and Tax Implications 4
What is a 'deed in lieu of foreclosure'?