Real Estate Investing Real Estate Taxation 4

Question 1

What is 'bonus depreciation' and how does it benefit real estate investors?

Accepted Answer

100% first-year expensing of eligible short-lived property identified in a cost segregation study

Answer

Bonus depreciation allows investors to immediately deduct 100% (phasing down after 2022) of the cost of eligible property (5, 7, 15-year class assets) in the year placed in service.

Question 2

A property investor sells a commercial building for $2 million with an adjusted basis of $800,000. Straight-line depreciation claimed was $400,000. What is the unrecaptured Section 1250 gain?

Accepted Answer

$400,000

Answer

Unrecaptured Section 1250 gain equals the total straight-line depreciation previously claimed ($400,000), which is taxed at a maximum 25% rate rather than lower capital gains rates.

Question 3

Under Section 179, what limitation applies to rental real estate?

Accepted Answer

Section 179 cannot be used for property used predominantly to furnish lodging

Answer

Section 179 expensing generally cannot be used for property used to furnish lodging (such as residential rental property), making bonus depreciation the preferred acceleration strategy.

Question 4

What is a 'triple net lease' (NNN) and what are its tax implications for the landlord?

Accepted Answer

The tenant pays all operating expenses; the landlord's deductible expenses are reduced accordingly

Answer

In a NNN lease, the tenant pays property taxes, insurance, and maintenance; while this reduces landlord expenses, it also reduces their deductible operating costs, leaving primarily depreciation and mortgage interest as deductions.

Question 5

How are self-employment taxes treated for real estate rental income?

Accepted Answer

Rental income is generally exempt from self-employment tax unless the investor is a real estate dealer

Answer

Passive rental income is generally not subject to the 15.3% self-employment tax; however, real estate dealers who sell property as ordinary income may owe SE tax on those profits.

Real Estate Investing Practice Test

Real Estate Investing Practice Test

Real Estate Investing Real Estate Taxation 4