Unit 3: Concepts of Home Ownership

Question 1

Equity

Answer 1

As the total mortgage debt is reduced through monthly payments, the owner’s actual ownership interest in the property increases. This represents the paid-off share of the property held free of any mortgage. A homeowner’s mortgage payments build equity and, thus, increase net worth.

Equity also builds when the property’s value rises through area appreciation.

Question 2

Home Owners Insurance Policy

Answer 2

Lenders usually require that a homeowner obtain insurance when a debt is secured by the property.

While owners can purchase individual policies that insure against destruction of property by fire or windstorm, injury to others, and theft of personal property, most buy a combined homeowners insurance policy to cover all of these risks.

Question 3

PITI

Answer 3

The basic costs of owning a home include mortgage principal, interest, taxes, and insurance, known by the acronym PITI.

Home ownership also involves many other expenses, including trash removal fees, sewer charges, and maintenance and repairs.

Question 4

What are apartment complexes?

Answer 4

Groups of apartment buildings with any number of units in each building, which may include amenities such as parking, security, and swimming pools.

Apartment complexes can be lowrise or highrise.

Question 5

What is a condominium?

Answer 5

A popular form of residential ownership where owners share ownership of common facilities and management is provided by a governing association.

Monthly assessments are charged to owners for maintenance.

Question 6

How does cooperative ownership differ from condominium ownership?

Answer 6

In cooperatives, owners buy shares in a corporation that holds title to the building, rather than owning the units outright.

Cooperative owners receive proprietary leases for their units.

Question 7

What are Planned Unit Developments (PUDs)?

Answer 7

Self-contained developments that merge diverse land uses such as housing, recreation, and commercial concerns, planned under special zoning ordinances.

Owners do not have direct ownership in common areas, which are maintained by a community association.

Question 8

What are retirement communities also known as?

Answer 8

Active adult communities, often structured as PUDs and located in temperate climates.

They may provide shopping and health care facilities.

Question 9

What are highrise developments also called?

Answer 9

Mixed-use developments (MUDs) that combine office space, stores, theaters, and apartments into a single vertical community.

MUDs often offer amenities like spas and exercise facilities.

Question 10

What are converted-use properties?

Answer 10

Structures like factories or warehouses that have been renovated for residential use.

Examples include luxury lofts from abandoned warehouses.

Question 11

How are manufactured homes defined?

Answer 11

Homes including mobile homes that are now more often used as permanent residences or stationary vacation homes.

Increased space and lower costs have made them attractive.

Question 12

What are modular homes?

Answer 12

Prefabricated homes where each room is pre-assembled at a factory and then transported to the building site for final assembly.

They can be built much faster and cheaper than conventional homes.

Question 13

What are time-shares?

Answer 13

Properties shared by multiple purchasers who use the property at specific intervals, typically a vacation home.

Owners pay an annual maintenance fee in addition to the purchase price.

Question 14

Fill in the blank: A condominium provides ownership without the care and maintenance a _______ demands.

Answer 14

house

Question 15

The types of housing choices available to homebuyers are limited to apartment complexes or timeshares.

Answer 15

The statement is false. Among the different forms of housing available are apartment complexes, condominiums, cooperatives, PUDs, retirement communities, high rise developments, converted-use properties, manufactured housing, modular homes, time-shares, and more.

Question 16

Time-shares allow multiple purchasers to share ownership of a single property, usually a vacation home.

Answer 16

The statement is true. Each owner is entitled to use the property for a certain period of time each year, such as a specific week.

Question 17

What is a key concern for many members of Congress regarding housing?

Answer 17

Increasing the supply of affordable housing

This concern is shared by state legislatures and local governments as well.

Question 18

What percentage was the home ownership rate in the United States as of the first quarter of 2020?

Answer 18

65.3%

This statistic is provided by the U.S. Census Bureau.

Question 19

What is one of the factors to consider when deciding to purchase property?

Answer 19

How long a person wants to live in a particular area

Additional factors include financial situation, credit score, housing affordability, current mortgage interest rates, tax consequences, and future home price trends.

Question 20

Fill in the blank: The decision of whether to buy or rent involves considering _______.

Answer 20

[many factors]

These factors include personal financial circumstances, credit score, and housing market conditions.

Question 21

What role do real estate professionals have in relation to affordable housing?

Answer 21

They have a vital interest in ensuring affordable housing for all segments of the population

More homeowners lead to more business opportunities for real estate professionals.

Question 22

True or False: A person’s credit score is not a factor in deciding to purchase property.

Answer 22

False

The credit score is an important factor that individuals must evaluate.

Question 23

List three factors that influence the decision to buy or rent property.

Answer 23

• Financial situation
• Credit score
• Current mortgage interest rates

Other factors include housing affordability, tax consequences, and future price trends.

Question 24

What must individuals carefully evaluate before deciding to purchase property?

Answer 24

Their financial circumstances

This evaluation is crucial for making an informed decision.

Question 25

What are the financial advantages of purchasing a home?

Answer 25

Several advantages include -potential long-term gain from property value increase -building equity through mortgage payments -tax deductions available to homeowners. ## Footnote Homeownership provides distinct financial benefits compared to renting.

Question 26

What is a long-term gain in the context of home ownership?

Answer 26

A long-term gain occurs when the property's value increases, allowing for a sale that brings in more money than the owner paid. ## Footnote This can significantly contribute to the homeowner's overall financial wealth.

Question 27

What is equity in real estate?

Answer 27

Equity represents the paid-off share of the property held free of any mortgage, increasing as the total mortgage debt is reduced. ## Footnote It reflects the owner's actual ownership interest in the property.

Question 28

How does homeownership affect net worth compared to renting?

Answer 28

A homeowner's mortgage payments build equity, which increases net worth, while a tenant's payments do not contribute to ownership. ## Footnote Timely rent payments can help a tenant build a good credit rating, but they do not accumulate equity.

Question 29

What contributes to the increase of equity in a property?

Answer 29

Equity increases through mortgage payments and when the property's value rises due to area appreciation. ## Footnote Area appreciation can significantly enhance the overall investment value of the property.

Question 30

What tax benefits are available to homeowners?

Answer 30

Homeowners can access tax deductions that are not available to renters. ## Footnote These deductions can include mortgage interest and property tax deductions.

Question 31

T or F: The basic costs of owning a home are principal, interest, taxes, and income.

Answer 31

Explanation The statement is false. The basic costs of owning a home are principal, interest, taxes, and insurance.

Question 32

T or F: Current mortgage interest rates and housing affordability are the only two considerations in deciding whether to buy or rent property.

Answer 32

Explanation The statement is false. These are only two of many considerations. Other considerations include the length of time a person wants to live in a particular area, a person's financial situation, the tax consequences of owning versus renting, and the unpredictability of future changes to home prices and tax laws.

Question 33

What income tax advantage is available to homeowners?

Answer 33

Homeowners may deduct some or all of the mortgage interest paid up to a certain point. ## Footnote This deduction encourages home ownership by reducing taxable income.

Question 34

What is the mortgage interest deduction limit for mortgages taken out after December 14, 2017?

Answer 34

An individual may deduct interest off of debt up to $750,000. ## Footnote Mortgages taken out prior to this date are not affected as long as they are not over $1,000,000.

Question 35

Are loans generated prior to December 14, 2017, affected by refinancing?

Answer 35

No, as long as the amount refinanced is not greater than the original loan amount. ## Footnote This means homeowners can refinance without losing the interest deduction.

Question 36

What is the status of the interest deduction on second mortgages between January 1, 2018, and December 31, 2025?

Answer 36

The interest on a second mortgage is no longer tax deductible. ## Footnote This change impacts homeowners with multiple loans.

Question 37

What is the itemized deduction limit for state and local real estate taxes?

Answer 37

$10,000. ## Footnote This limit applies to the total of state and local taxes paid.

Question 38

What capital gains exclusion applies for married taxpayers who file jointly when selling a principal residence?

Answer 38

$500,000. ## Footnote This exclusion helps reduce taxable income from the sale of a home.

Question 39

What is the capital gains exclusion for taxpayers who file singly?

Answer 39

$250,000. ## Footnote This amount is also excluded from capital gains tax when selling a principal residence.

Question 40

How long must homeowners have owned and occupied the property to qualify for the capital gains exclusion?

Answer 40

At least two of the past five years. ## Footnote This requirement ensures that the property is used as a primary residence.

Question 41

What does the term 'capital gains' refer to?

Answer 41

The profit made when an asset is sold. ## Footnote Understanding capital gains is crucial for tax implications on property sales.

Question 42

How can tax considerations impact renters' decisions to purchase a home?

Answer 42

Renters can probably make a higher mortgage payment than their current rent payment due to tax savings. ## Footnote This suggests that tax benefits can make home ownership more financially feasible.

Question 43

True or False: The tax rate for capital gains has remained constant over the past decade.

Answer 43

False. ## Footnote The tax rate depends on the individual's or couple's tax bracket and can vary from year to year.

Question 44

What can real estate investors do to defer taxation of capital gains?

Answer 44

Make property exchanges ## Footnote Property exchanges allow investors to defer taxes on appreciated property.

Question 45

When does a property owner incur tax liability on a sale?

Answer 45

When additional capital or property is received ## Footnote Tax liability is deferred, not eliminated.

Question 46

What happens to the capital gain when the investor eventually sells the property?

Answer 46

It will be taxed ## Footnote The tax is deferred until the sale occurs.

Question 47

What is required for properties to qualify as a tax-deferred exchange under Section 1031?

Answer 47

They must be of like kind ## Footnote Like-kind property is defined by nature, character, or class.

Question 48

Does quality or grade matter for like-kind property?

Answer 48

No ## Footnote Most real estate is like-kind to other real estate.

Question 49

What must the exchanged property be to avoid capital gains tax?

Answer 49

Real estate of equal or greater value ## Footnote This applies to the value of the property exchanged.

Question 50

What is considered boot in a property exchange?

Answer 50

Receipt of cash gain or lessening of mortgaged debt ## Footnote Boot is subject to taxation.

Question 51

Who is required to pay tax on the boot during the exchange?

Answer 51

The party who receives it ## Footnote This tax is due at the time of the exchange.

Question 52

How is the value of the boot treated for tax purposes?

Answer 52

It is added to the basis of the property for which it is given ## Footnote This affects the calculation of future capital gains.

Question 53

What governs tax-deferred exchanges?

Answer 53

Strict federal requirements ## Footnote Competent guidance from a tax professional is essential.

Question 54

What is the primary role of a real estate licensee regarding tax implications?

Answer 54

To be familiar with the tax implications of purchasing or selling property. ## Footnote Licensees should not provide specific tax advice to avoid liability.

Question 55

What liability does a licensee face when making representations about tax implications?

Answer 55

A great deal of liability. ## Footnote Licensees should avoid giving specific tax advice.

Question 56

What should licensees recommend to their clients for guidance on tax implications?

Answer 56

Seek the advice of an accountant or tax professional. ## Footnote This helps mitigate the licensee's liability.

Question 57

T or F: A cap of 5400,000 is excluded from capital gains tax for profit on the sale of a principal residence by married taxpayers who file jointly.

Answer 57

Explanation The statement is false. $500,000 is the cap and is excluded from capital gains tax for profit on the sale of a principal residence by married taxpayers who file jointly.

Question 58

T or F: Although tax benefits to home ownership previously existed, those benefits have been abolished in recent years.

Answer 58

Explanation The statement is false. The federal tax laws still provide numerous tax advantages for homeowners.

Question 59

Why do most homeowners insure their property?

Answer 59

To protect their investment ## Footnote Insurance serves as a financial safeguard against various risks.

Question 60

What do lenders usually require from homeowners when a debt is secured by the property?

Answer 60

Homeowners insurance ## Footnote This requirement mitigates the lender's risk.

Question 61

What types of individual policies can homeowners purchase?

Answer 61

Policies that insure against destruction of property by fire or windstorm, injury to others, and theft of personal property ## Footnote These policies address specific risks associated with home ownership.

Question 62

What is the most common type of insurance purchased by homeowners?

Answer 62

Combined homeowners insurance policy ## Footnote This policy covers multiple risks in one package.

Question 63

What is the most common homeowners policy called?

Answer 63

Basic form

Question 64

Which types of perils are covered by a basic form homeowners policy? List at least five.

Answer 64

* Fire and lightning * Glass breakage * Windstorm and hail * Explosion * Theft

Question 65

What type of policy covers falling objects and damage due to the weight of ice, snow, or sleet?

Answer 65

Abroad form policy

Question 66

Which of the following is NOT typically covered by a special apartment or condominium policy? 1. Fire coverage 2. Theft 3. Structure damage 4. Public liability coverage

Answer 66

Structure damage

Question 67

What is a coinsurance clause in homeowners insurance?

Answer 67

A provision requiring the owner to maintain insurance equal to a specified percentage (usually 80%) of the replacement cost of the dwelling

Question 68

If a homeowner has a policy that covers 80% of the replacement cost of a $100,000 home, how much can they claim for $30,000 in fire damage?

Answer 68

$30,000

Question 69

If a homeowner only has insurance of $70,000 on a property valued at $100,000, what will be the prorated claim amount for $30,000 in damage?

Answer 69

$26,250

Question 70

Fill in the blank: The insurance company wants to ensure that the premiums it receives cover at least ______ of the risk.

Answer 70

80%

Question 71

What happens if the homeowner's insurance is below the required minimum coverage?

Answer 71

The claim will be prorated

Question 72

True or False: Homeowners insurance policies typically cover damage to both the structure and contents of a home.

Answer 72

False

Question 73

What types of damages are covered under an abroad form policy? List at least three.

Answer 73

* Accidental discharge, leakage, or overflow of water * Freezing of plumbing systems * Injury to electrical appliances

Question 74

What is the significance of the 80% coinsurance clause for insurance companies?

Answer 74

It ensures that premiums cover a substantial portion of the risk

Question 75

What was the primary purpose of the National Flood Insurance Act of 1968?

Answer 75

To help owners of property in flood-prone areas by subsidizing flood insurance and improving land-use management.

Question 76

Which agency administers the flood insurance program established by the National Flood Insurance Act?

Answer 76

Federal Emergency Management Agency (FEMA)

Question 77

Who prepares detailed maps identifying flood-prone areas in the country?

Answer 77

The Army Corps of Engineers

Question 78

What are special flood hazard areas (SFHAs)?

Answer 78

Areas where owners are required to obtain flood insurance to finance property with federal or federally related mortgage loans.

Question 79

What document must an insurance agent receive before determining the appropriate flood insurance rate?

Answer 79

An elevation certificate

Question 80

Who supplies the elevation certificate needed for flood insurance?

Answer 80

A licensed surveyor

Question 81

What do homeowners' insurance policies in flood-prone areas generally exclude?

Answer 81

Floods

Question 82

In designated areas, flood insurance is required on what types of buildings?

Answer 82

Residential, commercial, industrial, and agricultural

Question 83

Flood insurance can be purchased from which entities?

Answer 83

* Licensed property insurance brokers * National Flood Insurance Program (NFIP) * Designated servicing companies in each state

Question 84

How often are flood insurance policies written?

Answer 84

Annually

Question 85

Fill in the blank: Homeowners' insurance policies in flood-prone areas always exclude _______.

Answer 85

floods

Question 86

How does FEMA define a flood?

Answer 86

A general and temporary condition of partial or complete inundation of two or more acres of normally dry land or two or more properties from: * overflow of inland or tidal waters * unusual and rapid accumulation or runoff of surface waters from any source * mudflow * collapse or subsidence of land along the shore of a lake or similar body of water due to erosion or undermining caused by waves or currents

Question 87

What type of damages are covered by flood insurance policies?

Answer 87

Physical damage to a building or personal property directly caused by a flood

Question 88

Is damage from sewer backups covered by flood insurance?

Answer 88

Yes, if it results directly from flooding

Question 89

What are the two types of flood insurance policies?

Answer 89

* Replacement cost value (RCV) * Actual cost value (ACV)

Question 90

Do deductibles and premiums for flood insurance vary?

Answer 90

Yes, they vary according to the type of policy

Question 91

True or False: To finance property with federal mortgage loans, owners in flood-prone areas are required to obtain flood insurance.

Answer 91

Explanation The statement is true. Homeowners insurance policies in flood-prone areas always exclude floods, so flood coverage must always be purchased as a separate policy.

Question 92

True or False: Basic form and broad form are two common types of homeowners insurance policies.

Answer 92

Explanation The statement is true. These are two common types of homeowners insurance policies. Basic form is the most common form of policy.