Real Estate Investing Tax Implications of Ownership 3

Question 1

What is the Net Investment Income Tax (NIIT) rate that applies to passive rental income for high-income investors?

Accepted Answer

3.8%

Answer

The Net Investment Income Tax imposes an additional 3.8% tax on passive investment income, including rental income, for taxpayers above certain income thresholds.

Question 2

Under the passive activity loss rules, when can a real estate professional deduct rental losses against ordinary income without limitation?

Accepted Answer

When they materially participate and meet real estate professional status requirements

Answer

Taxpayers qualifying as real estate professionals — spending more than 750 hours and more than half their working time in real estate activities — can deduct rental losses against ordinary income.

Question 3

What tax benefit allows investors to defer capital gains by reinvesting proceeds from a sold property into a like-kind property?

Accepted Answer

Section 1031 exchange

Answer

A Section 1031 like-kind exchange allows investors to defer capital gains taxes by reinvesting proceeds from a sold investment property into another qualifying like-kind property.

Question 4

How long does a commercial building (nonresidential real property) take to fully depreciate under MACRS?

Accepted Answer

39 years

Answer

Under MACRS, nonresidential real property (commercial buildings) is depreciated over 39 years using the straight-line method.

Question 5

Which of the following correctly describes a 'step-up in basis' at death for inherited real estate?

Accepted Answer

The heir's basis is stepped up to the property's fair market value at the date of death

Answer

When real property is inherited, the heir receives a stepped-up basis equal to the fair market value at the date of death, eliminating capital gains tax on pre-death appreciation.

Real Estate Investing Practice Test

Real Estate Investing Practice Test

Real Estate Investing Tax Implications of Ownership 3