Real Estate Investing Real Estate Taxation 3

Question 1

A real estate investor qualifies as a 'real estate professional' for tax purposes. What does this allow them to do?

Accepted Answer

Deduct rental losses without limitation against ordinary income

Answer

Real estate professionals (750+ hours/year in real property trades) can treat rental activities as non-passive, allowing unlimited deduction of rental losses against ordinary income.

Question 2

What is the 'stepped-up basis' benefit that heirs receive on inherited real estate?

Accepted Answer

The basis resets to fair market value at the date of death

Answer

Inherited real estate receives a stepped-up basis equal to the fair market value at the decedent's date of death, eliminating any built-up capital gain tax liability.

Question 3

How does the IRS distinguish between a deductible repair and a capital improvement on rental property?

Accepted Answer

Repairs restore property to original condition; improvements add value or extend useful life

Answer

Repairs maintain property in its current condition and are immediately deductible, while capital improvements add value, extend useful life, or adapt the property to a new use and must be capitalized.

Question 4

What is the tax treatment of mortgage interest paid on a rental property?

Accepted Answer

It is deductible as a rental expense on Schedule E

Answer

Mortgage interest on rental property is fully deductible as an ordinary rental expense on Schedule E, not subject to the personal mortgage interest deduction limits of Schedule A.

Question 5

An investor uses a Delaware Statutory Trust (DST) to complete a 1031 exchange. What is the primary tax advantage?

Accepted Answer

DST interests qualify as like-kind replacement property in a 1031 exchange

Answer

DST beneficial interests qualify as like-kind replacement property in a 1031 exchange, allowing investors to defer capital gains while gaining access to institutional-quality properties.

Real Estate Investing Practice Test

Real Estate Investing Practice Test

Real Estate Investing Real Estate Taxation 3