# Chp. 31 Quiz - Income Tax Issues Flashcards

1
Q

What is the formula for determining the amount realized from the sale of a home?

A

Sale price – costs of sale

2
Q

In a 1031 exchange, what is the period within which a person who has sold the relinquished property must receive the replacement property?

A

The exchange period

3
Q

An unrealized capital gain is

A

The amount of profit that would result in the sale of an investment if it were to be sold.

4
Q

The Taxpayer Relief Act allows penalty-free IRA withdrawals for

A

5
Q

What is the class life for residential structures?

A

27.5 years

6
Q

Section 1031 exchanges are

A

tax deferred.

7
Q

Lori purchased a home for \$250,000 with an additional \$5,000 in related purchase costs and then added a garage at a cost of \$25,000. She sold the home 10 years later for \$575,000 and paid \$35,000 in selling costs. She will pay capital gains tax on how much?

A

\$10,000

*\$250,000 + \$5,000 = \$255,000 beginning basis + \$25,000 capital improvements = \$280,000 adjusted basis; \$575,000 selling price – \$35,000 selling costs = \$540,000 amount realized – \$280,000 adjusted basis = \$260,000 gain on sale. The capital gains tax exclusion for a single person is \$250,000, so Lori will pay capital gains tax on \$10,000 (\$260,000 gain – \$250,000 exclusion = \$10,000).

8
Q

Which of the following statements about points is true?

A

Points paid on a second home can only be deducted over the life of the loan.

9
Q

The tax rate that applies to income is called the

A

Marginal tax bracket.

10
Q

When was the Taxpayer Relief Act signed into law?

A

1997

11
Q

A/n ______________ is the financial result of an investment that has been sold at a profit.

A

realized capital gain

12
Q

The party who receives boot in a tax- free exchange has

A

a net gain and must pay taxes on the difference.

13
Q

What is the formula for determining the gain on the sale of a home?

A

Amount realized – adjusted basis = gain on sale.

14
Q

On what properties can the owner take a mortgage interest deduction?

A

A qualified primary or second home

15
Q

John and Sheryl bought their home for \$354,000. They made \$129,000 of improvements. They sold the home for \$1,085,000 and paid \$56,000 in selling expenses, including the broker’s commission. On what amount will they pay capital gains tax?

A

\$46,000

16
Q

What is the maximum net capital loss that can be deducted annually?

A

\$3,000

17
Q

Which of the following properties are not eligible for like-kind exchange under Section 1031?

A

Properties outside the United States

18
Q

Which provision of the Taxpayer Relief Act of 1997 allowed first time buyers to use IRA funds for a house purchase?

A

Retirement savings

19
Q

Rob and Lori purchased a home for \$350,000 with an additional \$5,000 in related purchase costs and then added a garage at a cost of \$25,000. They sold the home for \$450,000 and paid \$28,000 in selling costs. They will pay capital gains tax on how much?

A

Zero

*\$350,000 + \$5,000 = \$355,000 beginning basis + \$25,000 capital improvements = \$380,000 adjusted basis; \$450,000 selling price – \$28,000 selling costs = \$422,000 amount realized – \$380,000 adjusted basis = \$42,000 gain on sale. The capital gains tax exclusion for a married couple filing jointly is \$500,000, so Rob and Lori will pay no capital gains tax on this sale because their gain is less than the exclusion.

20
Q

What is a measurement of how much is invested in the property for tax purposes?

A

Basis

21
Q

What do we call investment funds from investors who do not materially participate in managing the investment?

A

Passive activity income