unit 6

Question 1

If a property has a yearly income of $100,000 and ownership expenses of $110,000, the property provides the investor $10,000 in

Answer 1

negative cash flow.

Question 2

Which of the following is similar to a mutual fund?

Answer 2

An equity REIT

Question 3

Which of the following is considered a benefit of real estate investment?

Answer 3

The availability of tax shelters

Question 4

Income from interest, stock dividends, and royalties is

Answer 4

portfolio income.

Question 5

If an investor’s adjusted basis in a property is $400,000 and the property has a net selling price of $500,000, the investor has a $100,000

Answer 5

capital gain.

Question 6

An investor decides to liquidate property previously acquired through a 1031 exchange. If she is not acquiring replacement property in this transaction, which statement regarding capital gains taxes would beTRUE?

a. Capital gains taxes are eliminated in a 1031 exchange; therefore, no tax would be due on the sale.
b. Capital gains taxes are due on the total capital gain accumulated since the purchase of the initial property.
c. Capital gains taxes are deferred; therefore, taxes are due only the gain accumulated in the initial property before the 1031 exchange.
d. Capital gains taxes are due only on the gain accumulated since the acquisition of the property being liquidated.

Answer 6

Capital gains taxes are due on the total capital gain accumulated since the purchase of the initial property.

Question 7

Joan has two rental properties that are exactly the same size. One is a new duplex near downtown Austin, and the other is a duplex built in 1971 in Manor. What happens to the duplex in Manor if she can’t rent it out?

Answer 7

If rent cannot cover expenses, there will be a negative cash flow.

Question 8

What are the three factors that determine cash flow?

Answer 8

Amount of rent received, operating expenses and method of debt repayment

Question 9

Jacob has invested in a real estate investment syndicate that purchased a shopping center. Which doesNOTdescribe the advantages of his participating in the syndicate?

a. Jacob owns a certain percentage of a particular parcel of real estate.
b. Jacob was able to invest only a modest amount of money but owns part of a large-scale, high-profit, high-risk shopping center.
c. Jacob will be able to sell his interest in the syndicate upon the approval of the syndicate’s management.
d. Jacob enjoys the same federal income tax advantages as a sole-owner real estate investor.

Answer 9

b. Jacob was able to invest only a modest amount of money but owns part of a large-scale, high-profit, high-risk shopping center.

Question 10

An investor may defer federal income taxes on a portion of the gain on the sale of a property, provided all sales proceeds are not received during the year of the sale. This describes

Answer 10

an installment sale.

Question 11

Joan has two rental properties (duplexes) that are exactly the same size with a one-car garage for each unit. Both are located within walking distance of public transportation. One is a new duplex near downtown Austin, and the other is a duplex built in 1971 in a suburb of Austin. Why can she charge more money for the duplex in Austin?

Answer 11

Its location and its appearance

Question 12

Which of the following is a tax device that allows cash flows from an underlying block of commercial mortgages to be passed through to security holders without income taxes at the level of the trustee or agent?

Answer 12

A real estate mortgage investment conduit (REMIC)

Question 13

State laws passed requiring registration of securities to protect the public from investing schemes are commonly called

Answer 13

blue-sky laws.

Question 14

Which of the following is aTRUEstatement?

a. Risks generally are directly proportional to intrinsic value.
b. Risks generally are indirectly proportional to leverage.
c. Risks generally are directly proportional to leverage.
d. Risks generally are directly proportional to appreciation.

Answer 14

c. Risks generally are directly proportional to leverage.

Question 15

What is the degree of risk associated with real estate investment?

Answer 15

Moderately high

Question 16

What is it called when an investor refinances existing holdings and uses the proceeds to buy more properties?

Answer 16

Pyramiding

Question 17

If a property is worth $320,000 and has loans of $10,000 against it, the owner’s equity is

Answer 17

receive most of the trust’s income each year.

Question 18

Shareholders in a real estate investment trust (REIT) generally

Answer 18

receive most of the trust’s income each year.

Question 19

A property’s equity represents its current value less

Answer 19

mortgage indebtedness.

Question 20

In what type of partnership do all members share equally in the managerial decisions, profits, and losses involved with the investment?

Answer 20

General partnership

Question 21

If investor A exchanges a building worth $200,000 for investor B’s building worth $150,000, a car worth $20,000, and $30,000 in cash, investor A has a taxable boot of

Answer 21

$50,000.

Question 22

A parcel of property that increases in value because of its location in the center of an affluent and rapidly growing neighborhood is an example of

Answer 22

appreciation through intrinsic value.

Question 23

Syndications often come under securities registration laws administered by the federal

Answer 23

Securities and Exchange Commission (SEC).

Question 24

An investor sold a six-unit apartment building and purchased a 10-unit building with same market value. The investor gained $40,000 on the sale of the six-unit building, but did not utilize a 1031 exchange. Therefore, this gain

Answer 24

will be taxed.

Question 25

An investment syndicate is to be set up to allow all members to share equally in the managerial decisions, profits, and losses involved in the venture. Which of the following is the business structureBESTsuited to these investors?

a. A limited partnership
b. A real estate mortgage investment conduit (REMIC)
c. A general partnership
d. A real estate investment trust (REIT)

Answer 25

c. A general partnership

Question 26

Taking advantage of which strategy reduces taxes to an investor in low-income housing?

Answer 26

Tax credits

Question 27

What is the definition ofcapital gain?

Answer 27

The difference between the adjusted basis of property and its net selling price

Question 28

Which statement isTRUEabout a syndicate?

a. Blue-sky laws do not apply.
b. Most profit on the investment is realized from rents.
c. It is a private or public business venture to own property.
d. Members must hold title as joint tenants.

Answer 28

c. It is a private or public business venture to own property.

Question 29

Investors can use the first $25,000 of losses from rental property to offset income from any source provided the investor actively participates in the management of the property and has taxable income before the deduction of no more than

Answer 29

$100,000.

Question 30

Janus would like to invest in real property. She is a broker and knows quite a bit about the ins and outs of commercial properties, including investments and management. She would like to go in on the purchase of a commercial office building with several of her business associates to house her real estate firm and perhaps other real estate‒related businesses, such as a mortgage lender and a title company. While she doesn’t have the financial resources to purchase the property by herself, she would prefer to run the entire operation by herself. Which of the following business organizations would fit her objectives?

Answer 30

A limited partnership real estate investment syndicate

Question 31

By directing funds to real estate investment trusts (REITS), real estate investors can take advantage of the same tax benefits as mutual fund investors. Which of the following doesNOTrepresent a REIT?

a. A mortgage REIT buys and sells mortgages with its income made from mortgage interest and origination fees.
b. A hybrid REIT invests in U.S. Treasury bonds.
c. The main profits from an equity REIT are from profits derived from the properties it owns.
d. An equity REIT pools an assortment of large-scale income properties and sells shares to investors.

Answer 31

b. A hybrid REIT invests in U.S. Treasury bonds.

Question 32

To be exempt from federal income tax, real estate investment trusts (REITS) must be structured to

Answer 32

invest at least 75% of its assets in real estate, other REITs, securities, or cash.