Real Estate Investing Legal and Tax Implications 5 β Questions and Answers
Question 1: What is 'bonus depreciation' as applied to real estate investing?
- An extra depreciation deduction for properties in opportunity zones
- Accelerated first-year depreciation on qualifying personal property and improvements (Correct answer)
- A state tax credit for green building upgrades
- Additional depreciation allowed after 27.5 years
Correct answer: Accelerated first-year depreciation on qualifying personal property and improvements
Bonus depreciation allows investors to immediately deduct a large percentage of the cost of qualifying short-lived assets (e.g., appliances, fixtures) in the year they are placed in service.
Question 2: Which of the following best describes a 'wrap-around mortgage'?
- A mortgage that covers multiple properties under one loan
- A new mortgage that encompasses an existing mortgage, with the seller collecting payments (Correct answer)
- A government-backed loan with an adjustable rate cap
- A mortgage that automatically refinances after five years
Correct answer: A new mortgage that encompasses an existing mortgage, with the seller collecting payments
In a wrap-around mortgage, the seller creates a new loan that includes the existing mortgage balance; the buyer pays the seller, who continues paying the original lender.
Question 3: For federal income tax purposes, what is the holding period required for long-term capital gains treatment on investment property?
- 6 months
- More than 12 months (Correct answer)
- 24 months
- 36 months
Correct answer: More than 12 months
An asset must be held for more than 12 months to qualify for the preferential long-term capital gains tax rates (0%, 15%, or 20%).
Question 4: What does an 'as-is' clause in a real estate purchase contract typically mean?
- The seller must disclose all known defects and repair them before closing
- The buyer accepts the property in its current condition with no repairs required from the seller (Correct answer)
- The buyer waives the right to a home inspection
- The seller provides a full warranty against hidden defects
Correct answer: The buyer accepts the property in its current condition with no repairs required from the seller
An 'as-is' clause means the buyer takes the property in its present condition; however, sellers must still disclose known material defects in most states.
Question 5: A landlord fails to maintain a habitable unit (no heat in winter), and the tenant stops paying rent. This legal theory is called:
- Unlawful detainer
- Constructive eviction (Correct answer)
- Implied warranty breach only
- Rent abatement
Correct answer: Constructive eviction
Constructive eviction occurs when a landlord's failure to maintain habitable conditions effectively forces the tenant to vacate or justify withholding rent.
Question 6: Which federal law requires lenders to provide borrowers with a Loan Estimate and Closing Disclosure in residential mortgage transactions?
- The Truth in Lending Act (TILA) alone
- RESPA alone
- TRID (TILA-RESPA Integrated Disclosure) (Correct answer)
- The Dodd-Frank Wall Street Reform Act only
Correct answer: TRID (TILA-RESPA Integrated Disclosure)
TRID, which combined TILA and RESPA disclosures, requires lenders to issue a Loan Estimate within three business days of application and a Closing Disclosure three days before closing.
Question 7: What is a 'homestead exemption' in the context of real estate investing?
- A tax deduction for mortgage interest on investment properties
- A property tax reduction available on a primary residence (Correct answer)
- A legal protection shielding investment properties from creditors
- A zoning allowance for home-based businesses
Correct answer: A property tax reduction available on a primary residence
A homestead exemption reduces the assessed value of a primary residence for property tax purposes and in some states protects it from certain creditor claims.
Real Estate Investing Legal and Tax Implications 5
What is 'bonus depreciation' as applied to real estate investing?