Unit 3 Quiz Flashcards
(20 cards)
A man incurs the following expenses: $9,500 in interest on a mortgage loan on his residence, $800 in real estate taxes plus a $450 late payment penalty, and a $1,000 loan origination fee paid in the course of purchasing his home. How much may be deducted from his gross income?
A) $10,500
B) $11,300
C) $9,800
D) $11,750
Explanation
The answer is $11,300.
59,500 + 5800 + $1,000 = $11,300. Late payment penalties may not be deducted.
A highrise development that includes office space, stores, theaters, and apartment units is an example of
A) a mixed-use development (MUD).
B) special cluster zoning.
C) a converted-use property.
D) a planned unit development (PUD).
Explanation
The answer is a mixed-use development (MUD). Highrise developments (also called mixed-use developments [MUDs]) combine such elements as office space, stores, theaters, and apartment units into a single vertical community. MUDs are usually self-contained, offering convenient options (such as spas or exercise facilities) to those living there.
What should a real estate licensee do if a client asks for advice about the tax benefits of home ownership?
A) None of these.
B) Share with the client the various tax benefits of home ownership.
C) Advise the client to seek the advice of an attorney.
D) Tell the client that home ownership always comes with tax deductions.
Explanation
The answer is advise the client to seek the advice of an attorney. While it is important for a real estate licensee to be familiar with the tax implications of purchasing or selling property, making representations about those implications to their clients opens licensees up to a great deal of liability. It is essential to recommend that clients seek the advice of an accountant or tax professional for guidance.
A building that is remodeled into residential units and is no longer used for the purpose for which it was originally built is an example of
A) a converted-use property.
B) urban homesteading.
C) planned unit development.
D) a modular home.
Explanation
The answer is a converted-use property. Converted-use properties are factories, warehouses, office buildings, hotels, schools, places of worship or churches, and other structures that have been converted to residential use.
An unmarried homeowner has $80,000 in equity in his primary residence of three years. The owner sells the residence for $135,000. The broker’s commission was 5.5%, and other selling expenses amounted to $1,200. What is the owner’s taxable gain on this transaction?
A) $0
B) $46,375
C) $61,425
D) $47,575
The term capital gains refers generally to the profit made when an asset is sold.
Explanation
The answer is $0. Taxpayers who file singly are entitled to a $250,000 exclusion. The exemption is available so long as the homeowners have owned and occupied the property as their primary residence for at least two of the past five years.
Which of these is NOT a cost or expense of owning a home?
A) Homeowners insurance
B) Interest paid on borrowed capital
C) Taxes on personal property
D) Maintenance and repairs
Explanation
The answer is taxes on personal property. The basic costs of owning a home, known by the acronym PITI, include the mortgage principal and interest, real estate taxes, and homeowners insurance. Home ownership also involves many other expenses, including trash removal fees, sewer charges, and maintenance and repairs.
In determining whether a prospective buyer can afford a certain home purchase, lenders will consider
A) address of the home.
B) all of these.
C) credit score.
D) ethnicity of the buyer.
Explanation
The answer is credit score. Credit scores and down payments play a key role when lending institutions decide whether to lend money. In addition to the credit score, pretax monthly income and payments on all debts—total housing plus any long-term debts such as car payments, student loans, or other mortgages—are taken into consideration.
Theft, smoke damage, and damage from fire are covered under which type of homeowners insurance policy?
A) Coinsurance
B) Basic form
C) National Flood Insurance Program policies
D) Broad form
Explanation
The answer is basic form. The most common homeowners policy is called a basic form. It provides property coverage against such losses from fire and lightning, damage from smoke, vandalism and malicious mischief, theft, and loss of property removed from the premises when it is endangered by fire or other perils.
A couple paid $56,000 for their property 20 years ago. Today, the market value is $119,000, and they owe $5,000 on their mortgage. Regarding this situation, which of these is TRUE?
A) The $114,000 difference between the market value and the amount owed on the mortgage is their equity.
B) The $63,000 difference between the original investment and the market value is their tax basis.
C) The $114,000 difference between the market value and the mortgage is their replacement cost.
D) The $63,000 difference between the original investment and the market value will be used to compute the
capital gains.
Explanation
The answer is the $114,000 difference between the market value and the amount owed on the mortgage is their equity. As the total mortgage debt is reduced through monthly payments, the owner’s actual ownership interest in the property increases. This increasing ownership interest is called equity and represents the paid-off share of the property held free of any mortgage.
A community that merges housing, recreation, and commercial units into one self-contained development is called a
A) condominium.
B) mixed-use development (MUD).
C) cooperative.
D) planned unit development (PUD).
Explanation
The answer is planned unit development (PUD). Planned unit developments (also called master-planned communities) merge such diverse land uses as housing, recreation facilities, and commercial concerns in one self-contained development.
When married homeowners who file jointly realize a gain from the sale of their home that exceeds $500,000, which of these is TRUE?
A) The homeowners will not pay capital gains tax if they are over 55.
B) The excess gain will be taxed at the homeowners’ income tax rate.
C) Up to $125,000 of the excess profit will be taxed as a capital gain.
D) The gain exceeding $500,000 will be taxed at the current applicable capital gains rate.
Explanation
The answer is the gain exceeding $500,000 will be taxed at the current applicable capital gains rate.
For capital gains beyond these $500,000/$250,000 exclusions, the tax rate has varied over the past decade and depends upon what tax bracket an individual or married couple falls into.
The portion of an owners’ property value that exceeds the amount of their mortgage debt is called
A) equality.
B) surplus.
C) equity.
D) escrow.
Explanation
The answer is equity. As the total mortgage debt is reduced through monthly payments, the owner’s actual ownership interest in the property increases. This increasing ownership interest is called equity and represents the paid-off share of the property held free of any mortgage.
Which clause is found in MOST homeowners insurance policies?
A) Coinsurance clause
B) Property devaluation clause
C) Co-ownership clause
D) Property improvement clause
Explanation
The answer is coinsurance clause. Most homeowners insurance policies contain a coinsurance clause. This provision usually requires that the owner maintain insurance equal to a specified percentage (usually 80%) of the replacement cost of the dwelling (not including the price of the land).
Homeowners may deduct which of the following expenses when preparing their income tax return?
A) Flood insurance premiums
B) Insurance premiums
C) Interest paid on maintenance and repairs
D) Real estate taxes
Explanation
The answer is real estate taxes. To encourage home ownership, the federal government allows homeowners certain income tax advantages. Homeowners may deduct some or all of the mortgage interest paid from their income, as well as real estate taxes and certain other expenses.
Tom, an art history professor owned and lived in a home in Dubuque, Iowa, for the past four years. He spends a year in Italy after which he decides to sell his home in Dubuque and live in Rome. If Tom is single, he can claim
A) the $250,000 capital gains exemption.
B) a 1031 exchange.
C) a one-time exemption of $250.000.
D) the $500.000 capital gains exemption.
Explanation
The answer is the $250.000 capital gains exemption. Tom is single and Dubuque has been his principal residence for 2 of the last 5 years. This entitles him to a $250,000 capital gains exemption.
One result of the capital gains tax law is that MOST homeowners
A) may build more equity in their primary residence.
B) may use the $250,000 or $500,000 capital gains exclusion if they lived in the property for two out of the last five years.
C) will pay capital gains tax at an 8% lower rate on their home sales.
D) will be permitted to use the $125,000 over-55 exclusion more than once.
Explanation
The answer is may use the S250,000 or $500,000 capital gains exclusion if they lived in the property for two out of the last five years. The $250,000/$500,000 exclusion from capital gains tax is available so long as the homeowners have owned and occupied the property as their primary residence for at least two of the past five years.
Which of the following would NOT be like-kind property in a 1031 exchange of a rental single family home?
A) Single family home to be used as principal residence
B) Three-unit rental building
C) A condo purchased as income property
D) Vacant land
Explanation
The answer is single family home to be used as principal residence. 1031 exchanges are for investment property. Investment use and personal use of a principal residence would not qualify.
Each room of a house was pre-assembled at a factory, driven to the building site on a truck, and then lowered onto its foundation by a crane. Later, workers finished the structure and connected plumbing and wiring before the owners moved in. Which term BEST describes this type of home?
A) Manufactured
B) Mobile
C) Modular
D) Converted
Explanation
The answer is modular. Each room in a modular home is pre-assembled at a factory, driven to the building site on a truck, and then lowered onto its foundation by a crane. Later, workers finish the structure and connect plumbing and wiring.
Which of these is NOT covered in either a basic form or a broad form homeowners insurance policy?
A) Explosion
B) Fire and lightning
C) Flood
D) Windstorm and hail
Explanation
The answer is flood. A basic form policy provides property coverage against fire and lightning, explosion, and windstorm and hail. Owners in flood-prone areas called special flood hazard areas (SFHAs) are required to obtain flood insurance.
A single woman bought a home 18 months ago and is now selling because she found a new job in another city. A married couple filing joint taxes has owned a nine-bedroom home for three years. Nov/, the couple wants to move to a small condominium unit. A single man owned his home for 17 years, sold it, and will use the proceeds from the sale to purchase a larger house. Based on these facts, which of these people is entitled to the $500.000 capital gains exclusion?
A) The single woman and the single man
B) The married couple and the single man
C) The single woman
D) The married couple
Explanation
The answer is the married couple. The federal government enacted several federal tax reforms that significantly changed the importance of tax considerations for most homesellers. For example, $500.000 is excluded from capital gains tax for profits on the sale of a principal residence by married taxpayers who file jointly. Taxpayers who file singly are entitled to a $250,000 exclusion. The exemption is available so long as the homeowners have both owned and occupied the property as their primary residence for at least two of the past five years. The term capital gains refers generally to the profit made v/hen an asset is sold.
