Real Estate Investing Real Estate Taxation 5

Question 1

What is 'Unrelated Business Income Tax' (UBIT) as it applies to real estate in an IRA?

Accepted Answer

A tax on income from debt-financed property held in a tax-exempt account like an IRA

Answer

UBIT applies to income generated by debt-financed property (mortgaged real estate) held in an IRA or other tax-exempt entity, taxing the leveraged portion of income at trust tax rates.

Question 2

A landlord spends $15,000 replacing all windows in a rental property. Under current IRS rules (Tangible Property Regulations), this expenditure is most likely treated as:

Accepted Answer

A capital improvement that must be depreciated

Answer

Under the IRS Tangible Property Regulations, replacing all windows in a building unit of property constitutes a betterment or restoration, requiring capitalization and depreciation over the applicable recovery period.

Question 3

What is the 'safe harbor' rule for small taxpayers under the IRS Tangible Property Regulations?

Accepted Answer

Taxpayers may elect to expense repairs/improvements up to the lesser of $10,000 or 2% of the unadjusted basis of the building per year

Answer

The small taxpayer safe harbor allows landlords with gross receipts under $10 million to expense amounts up to the lesser of $10,000 or 2% of the building's unadjusted basis per year without capitalizing.

Question 4

How is property inherited through a trust typically treated for tax basis purposes compared to property directly inherited from a decedent?

Accepted Answer

The tax treatment depends on the trust type — revocable trusts get a step-up; irrevocable trusts may not

Answer

Property in a revocable living trust is included in the decedent's estate and receives a stepped-up basis, while assets in irrevocable trusts may not qualify for the step-up since they were removed from the estate.

Question 5

What is 'like-kind' property in the context of a 1031 exchange for real estate?

Accepted Answer

Any real property held for investment or business use qualifies as like-kind to other real property

Answer

For real estate, 'like-kind' is broadly interpreted — any U.S. real property held for investment or business use qualifies as like-kind to any other U.S. real property held for investment or business.

Real Estate Investing Practice Test

Real Estate Investing Practice Test

Real Estate Investing Real Estate Taxation 5