REG - Property

Question 1

What is a mortgage? And what happens when there are multiple mortgages?

Answer 1

A mortgage provides the mortgagee with a nonpossessory security interest in real property. The mortgagor retains legal title to the building despite mortgage.
The purpose of recording the mortgage is to give constructive notice to third parties acquiring an interest in the property that the property is subject to an existing mortgage. It is effective without recording. Recording only serves to protect the rights of the mortgagee against 3rd parties who do not have actual notice of the mortgage. The mortgage must be in writing and signed by mortgagor to be valid.
When there are multiple mortgages on a single parcel of real property, the first mortgagee to duly record the mortgage will have priority over all subsequent mortgagees.
Need to satisfy the first mortgage holder (has priority) and then goes to second. If the foreclosure amount is insufficient, the mortgage holder becomes an unsecured creditor for the remaining balance.
A default on a second mortgage does not constitute a default on the first. Consent of the first mortgage is not needed to pay off the second.
The second mortgagee may opt to pay off the first mortgage to protect its interest. The 2nd mortgage can also be paid off before maturity without consent of first mortgagee.

Question 2

What is a quitclaim deed?

Answer 2

Only conveys to the grantee whatever interest the grantor has in the property. If the grantor has no interest, then the grantee/purchaser receives nothing.

Question 3

What is a bargain and sale deed?

Answer 3

The grantor does not promise that he has good title, or any title, to the property.

Question 4

What is special warranty deed?

Answer 4

The grantor only warrants that he has done nothing to impair the title. However, the grantor does not warrant against prior encumberances (liens that occurred before grantor’s ownership)

Question 5

What is general warranty?

Answer 5

Warrants the greatest number of things and thus provides a purchaser with the most extensive protection against defects of title. A general warranty deed warrants that 1 - the seller has title and the power to convey the property described in the deed, 2 - the property is free from any encumberances, except as disclosed in the deed, 3 - the purchaser will not be disturbed in his possession of the property by the seller or some 3rd party’s lawful claim to ownership.

Question 6

How long do trademarks last in the US?

Answer 6

Trademarks last as long as they retain their distinctiveness, so they can last indefinitely. Trademarks are terminated by their actual abandonment or their constructive abandonment if the owners allows the trademark to lose its distinctiveness.
They are protected even if not registered.

Question 7

Who prevails under notice statute, race statute, and race-notice statute?
Scenario, A deeded B but B did not record. Later, A deeded C and C was aware of prior conveyance to B, but recorded deed before B.
What if B or C only paid % of the face value for note?

Answer 7

Notice - a subsequent good faith purchaser whether he records or not, wins over the previous purchaser who did not record before that subsequent purchase.
Race-notice - subsequent good faith purchaser wins only if he also records first.
Race - first to record
Scenario, B wins under notice and race-notice as C is not in good faith. C wins under race as first to record.

If they only paid % of face value, it does not prevent them from receiving the full face value, they should be entitled for the full face amount of the note.

Question 8

What happens if a mortgage is not recorded?

Answer 8

It must be recorded to be effective against subsequent third parties who acquire an interest in property with no knowledge of the prior mortgage. Thus, if a first mortgagee does not record, and a subsequent mortgagee who records will have a priority if he did not have knowledge of the first mortgage.

Question 9

What is real property?

Answer 9

Real property includes land and things attached to land in a relatively permanent manner.

Question 10

What is the difference between joint tenant and tenant in common?

Answer 10

When rights in property held in joint tenancy are conveyed without the consent of the other joint tenants, the new owner becomes a tenant in common with the remaining joint tenants.

Question 11

What is title insurance?

Answer 11

Title insurance insures against all defects of record. However, it does not insure against those defects which would be disclosed by physical inspection of the property or those defects listed as exceptions on the face of the policy.
Title insurance covers defects of record at the time the policy is issued and not events subsequent to the effective date of the policy.
Title insurance does not run with the property and cannot be transferred to the purchaser if property is transferred.
The face of the title insurance policy will often state existing exceptions (taxes/easements) that are not cleared prior to the purchaser taking possession of the property and which the policy will not insure against.
Title insurance does not cover zoning violations, closing costs, and unrecorded assessments.

Question 12

What factors determines whether personal property has become a fixture?

Answer 12

Fixture is an item that was originally personal property but which is affixed to real property in a relatively permanent fashion such that it is considered to be part of the real property. Many factors are considered such as the extent of injury that would be caused to the real property by the removal of the item, the manner of attachment, and the adaptability of the item to the real estate.The value of the item is NOT a factor.

Question 13

Computer software copyrightable and defense?

Answer 13

It is generally recognized as being copyrightable (includes databases). The fair use doctrine allows the user a defense to some allegations of copyright infringement.
Works published after March 1, 1989 do not require a copyright notice.

Question 14

Real vs personal property, example of trees cut down to build house

Answer 14

Trees are considered real property (part of land). When cut, it is no longer real property and becomes personal property. A house built on land becomes real property.
Real to personal to real.

Question 15

What happens to the mortgages with a purchaser at a judicial sale?

Answer 15

The purchaser will take the property free of any claims. The mortgage holders will get the proceeds, first to first mortgage holder, remainder to subsequent in order.
The previous owner/mortgagor has a right of redemption after the judicial sale.

Question 16

What are the rights and liabilities of a lessee?

Answer 16

The lessee may engage in an assignment/sublease without consent unless it is expressly prohibited by the lease.
The lessee has a possessory interest in the building, has the right to occupy the building for the term of the lease regardless of whether the owner sells property to a third party.
Lessee is only liable for those injuries that arise out of his negligence and NOT for all injuries sustained in the building during the lease term.

Question 17

What provisions must be included in a residential lease agreement?

Answer 17

• the parties involved
• lease pmt amount
• lease term
• desc of the leased property
  The omission of any of these terms will cause the agreement to fail for indefiniteness. Note rent pmt due date is optional.

Question 18

What is and what are the elements of adverse possession?

Answer 18

Adverse possession is a method of acquiring title to real property by possession for a statutory period under certain conditions. Necessary elements:
1 - open and notorious possession
2 - hostile possession satisfied by purchaser taking possession under a good faith belief that the land in question was his
3 - actual possession
4 - continuous possession
5 - exclusive possession for 30 years

Question 19

What is required of a deed?

Answer 19

The deed must be delivered to the purchaser for transfer to be effective. It does not need to include a statement of the property’s value and does not need to include a general warranty of title.

Question 20

What is mislaid property vs lost vs abandoned?

Answer 20

If owner voluntarily puts it there and forgets. The owner of the premises acts as caretaker of the property until the owner comes back to retrieve it.
It is lost when owner involuntarily leaves the property someplace. Abandoned if owner intended to abandon or give up title to property.

Question 21

When does a gain or loss on a year end sale of stock arise for a cash basis vs accrual taxpayer?

Answer 21

If stock or securities traded on an established market are sold, the resulting gain or loss is recognized on the trade date (date trade is executed) by both taxpayers. It is not on date of receipt of cash proceeds.

Question 22

What is the definition of capital assets?

Answer 22

Includes investment property (stock of corp) and property held for personal use or as investment (personal residence). Stock is generally held as an investment, but would be excluded from the capital asset category if held for sale to customers in the normal course of business (stock held by a dealer in securities). Excludes property used in a trade or business (delivery truck, land used as a parking lot), excludes inventory and AR. Note treasury stock is not considered an asset, it is a reduction of SE.

Question 23

How do you determine the tax basis for purchased land and building? What is included?

Answer 23

The basis of property acquired by purchase is a cost basis and includes not only the cash paid and liabilities incurred (incl purchase money mortgage), but also includes certain settlement fees and closing costs such as abstract of title fees, installation of utility service, legal fees (incl title search, contract, and deed fees), recording fees, surveys, transfer taxes, owner’s title insurance, and any amounts the seller owes that the buyer agrees to pay, such as back taxes and interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

Question 24

How do you determine the tax basis for stocks?
Example - A purchased $6k of 100 CS of B. Later in year, B issued nontaxable stock dividend of 10 $100 par PS. Market values of CS and PS were 75$ and 150$.

Answer 24

Need to allocate original CS basis between CS and PS according to relative market values.
CS MV = 75X100= 7500
PS MV = 150X10 = 1500
Total MV = 9000
Ratio of CS to total is 7500/9000 or 5/6. Multiply ratio by original CS basis of 6k to get CS basis of 5k and PS basis of 1k.

Question 25

When is a capital asset considered held long term vs Sec 1231 asset? Ex: collection with basis of 2k bequeathed by uncle, was 10k on death, 15k 6 months later. Elected alternate valuation and sold for 12k, the date distributed.

Answer 25

Treated as a capital asset held long term since:
1 - property acquired from a decedent is considered to be held for more than 12 months regardless of its actual holding period
2 - collection is an investment asset in owner’s hand
It is not a section 1231 asset as it was not held for use in owner’s trade or business.

Question 26

When is a loss disallowed?

Answer 26

Disallowed if it results from a sale/exchange between a corporation and a person who owns (directly or constructively) more than 50% of its stock.

Question 27

When is a gain considered Section 1231 vs ordinary income? If machineis sold for 41k but was purchased for 40k and had adjusted basis of 21k on sale date.

Answer 27

The sale of machinery is subject to sec 1245 recapture.
The realized gain of 20k is treated as ordinary income to the extent of the depreciation deducted of 19k. The remaining 1k is sec 1232 gain.

Question 28

What part of gain is taxed as long term capital gain?

Office furniture purchased for 30k and sold later for 37k when depred totaled 20.7k.

Answer 28

Office property is sec 1245 property and gain from its sale is subject to sec1245 recapture, which recaptures gain as ordinary income tot the extent of all deprec previously deducted. Any gain not recaptured would be a sec 1231 gain because it was property that was used in a trade or business and held for more than one year.
If there is a net sec 1232 gain for the year, then this gain could also be taxed as a long term capital gain.
Sec 1245 recapture of 20.7k and sec1231/LTCG of 7k.

Question 29

What is the basis in equipment if given as a gift?

What is gain or loss recognized? Example: gift of shares, donor’s basis 2.8k, FMV 2.6k, sold for 2.7k years later.

Answer 29

The basis for property received as gift is the same as the donor’s basis. Since it is below FMW, the donor’s basis is used for new owner’s basis for computing gain or loss, as well as depreciation of equipment.
No gain or loss reports since the sales price 2.7k falls below the gain basis of 2.8k and above the loss basis 2.6k.

Question 30

What is the basis of an asset received in a like kind exchange where boot was received? Example: trade tractor with adjusted basis of 3k and FMV of 3.3k for $500 cash and smaller tractor with FMV of 2.8k. $300 was recognized by owner on gain on transaction.

Answer 30

Basis of asset given up (3k) - less boot received (500) + plus gain recognized (300) = basis of asset received (2.8k)

Question 31

What is a wash sale and how is it recorded?
Example: 2011 A sold 300 shares of CS for $4.2k which was acquired in 2009 for $5k. It was repurchased less than a month later for $3.6k and sold a couple months later for $6k.

Answer 31

A wash sale is the purchase of substantially identical stock within 30 days of the sale of stock at a loss. The $800 loss incurred in the wash sale is disallowed. The basis of the replacement stock is its cost (3.6k) plus the disallowed wash sale loss (800). The holding period of the replacement stock includes the holding period of the wash sale stock. The amount realized (6k) less the basis (4.4k) yields a long term capital gain of 1.6k.

Question 32

Corp bought an apartment building for 200k and was sold years later in 2011 for 220k when asset balance net of accumulated deprec was 170k. What does Corp report on 2011 return?

Answer 32

Building qualifies as sec 1250 property and was sold by corp, so it is subject to recapture provisions of both sec 1250 and sec 291.
1250 - gain recognized on the sale must be recaptured as ordinary income to the extent of excess depreciation (deprec deducted in excess of st line). Because the bldg was depcrec using st line, there is no sec 1250 recapture.
291 recaptures 20% of the difference between the ordinary income that would have been recognized had the bldg been sec 1245 property (30k) and the ordinary income recognized under sec 1250 .
Thus, ordinary income is 6k (30kx20%) and the remaining gain of 44k is treated as sec1231 gain.

Question 33

How are net gains/losses reported and at what tax rate?
Example individual has: st cap loss of 70k, LT gain of 56k with unrecap sec 1250 at 25%, collectibles gain of 10k at 28%, and LT gain of 20k at 15%

Answer 33

Gains and losses including carryovers within each of the capital asset rate groups are netted to arrive at a net gain or loss for each group.
A net loss in any rate group is then applied to reduce the net gain in the highest rate group first. In this case, the net ST cap loss of 70k offsets the 28%collectibles first, then the 56k in 25% group, and finally the 4k in 15% group. As a result, the individual has a net capital gain of 16k which will be taxes at 15%.

Question 34

What is the amount of gain to be recognized from the sale of residence for a couple’s principal residence? Example, The net sales price is 890k and adjusted basis is 225k, the new condo purchased for 275k

Answer 34

An individual may exclude from income up to 250k of gain that is realized on the sale or exchange of a residence, if the individual owned and occupied the residence as a principal residence for an aggregate of at least 2 of the 5 years preceding the sale or exchange. The amount of excludable gain is increased to 500k for married individuals filing jointly if either spouse meets the OWNership req, and both spouses meet the USE requirement. Here they have a gain of 665k and qualify to exclude 500k from income. The remaining 165k gain is recognized and taxed.

Question 35

What happens when the transfer of property is part sale and part gift such as when parent purchases off of adult child for 12k when 14k was FMV. Child’s costs basis was 16k. Adult sold for 18k after to unrelated party.

Answer 35

The child is not allowed to recognize a loss, and is treated as having made a gift to adult equal to the difference of 2k between the FMV and selling price. Where a transfer of property is in part a sale and part gift, the basis of the property in the hands of the transferee/adult is generally the greater of 1- amount paid or 2-transferor’s basis fro the property at time of transfer. As a result, the adult’s basis for the stock is 16k, and the sale of 18k means they recognize a gain of 2k.

Question 36

What is the cost basis when alternate valuation is elected?

Answer 36

If alternate is elected but property was distributed at earlier date, the basis is the FMV on the date of distribution.

Question 37

What happens with sales between related taxpayers, incl family members? Ex: Purchased for 10k, sold to son at 7k FMV, son sells for 1k less to unrelated a few months later

Answer 37

Losses are disallowed on sales between related taxpayers. Since the son’s stock basis is determined by his cost at 7k, there is no tack on to parent’s holding period.
The adults loss of 3k is disallowed on the sale of stock to his son.
A later sale generates a 1k ST capital loss for the son.
If the son had sold at a gain, the parent’s disallowed loss would have been used to reduce the recognized gain.

Question 38

What is included in determining depreciable basis of equipment?

Answer 38

Basis of property acquired by purchase is its cost including amount paid in cash, debt obligations, other property, or services. Also included are amounts paid for sales tax, freight, installation and testing, excise taxes, revenue stamps, recording fees, and real estate taxes (if imposed on seller and assumed by buyer).