Chapter 9 � Business Organizations by cYevV8B


									Part I: The following questions are worth 2.5 points each. Provide the single best response.

1. Real estate markets are relatively inefficient because of all of the following except:
    (A) A limited number of buyers and sellers
    (B) Abbreviated flows of information on parcels of real estate
    (C) Limited government interference in real estate transactions and development
    (D) The high transaction costs related to real estate purchases and sales

2. To cope with asbestos found in an office building, the EPA suggests which of the following actions?
    (A) complete removal of all asbestos containing materials
    (B) removal of only friable asbestos
    (C) painting over, or sealing off, asbestos containing materials
    (D) instigate a management plan that involves training personnel, cleaning practices, and
        monitoring the air

3. All of the following are criteria used in judging the presence of a wetland area EXCEPT
    (A) an area inundated by surface or groundwater
    (B) presence of vegetation adapted to water-saturated soils
    (C) any area where water normally flows
    (D) saturation sufficient to develop anaerobic soil conditions

4. Under the Endangered Species Act, a "taking" includes a11 of the following EXCEPT
    (A) the killing of any wildlife listed as endangered
    (B) destroying food that may be used by endangered species .
    (C) habitat modifications that significantly impair behavioral patterns of an endangered
    (D) habitat modifications where an endangered species may live in the future

5. A non-freehold interest in land may also be identified as
    (A) adverse possession
    (B) a remainderman's interest
    (C) fee simple conditional title
    (D) a leasehold interest

6. The right that is limited to the use of a tract of land with no other rights conveyed is called
    (A) a life estate
    (B) a limited tenancy
    (C) an easement
    (D) a leasehold

7. An ownership right in land that terminates upon the death of one or more persons is called
    (A) a life estate
    (B) an inheritance
    (C) a devisee's right
    (D) a future interest

8. An estate in severalty means
    (A) joint tenancy
    (B) sole ownership
    (C) tenants in common
    (D) community property
9. The basic intent of community property laws is to
    (A) Avoid sexual discrimination
    (B) Ensure that husband and wife share property acquired during marriage on an
        equal basis
    (C) Reduce inheritance taxes for the survivor of a marriage
    (D) Protecting the rights of children resulting from marriage

10. The total amount of taxes assessed on real property is determined by the taxing authority's
    (A) budget requirements
    (B) estimate of property subject to tax
    (C) annual appraisal of all property
    (D) assessed value of taxable property

11. The 1986 Tax Act requires depreciation for non-residential property to be taken over a period of
    (A) 19 years
    (B) 27.5 years
    (C) 39 years
    (D) its useful life to the taxpayer

12. When an existing building is acquired, an allocation must be made between the value of the land and
  the value of the building because
    (A) land is depreciable at lesser rates
    (B) capital gain attributed to the land is not subject to tax at time of disposition
    (C) only the building is eligible for depreciation
    (D) the land may exceed the building in value

13. Something that maintains a property but does not increase its useful life is identified by the IRS as
    (A) an improvement
    (B) a replacement
    (C) an addition
    (D) a repair

14. The tax credit available for rehabilitation of certified historic structures amounts to
    (A) 20% of the cost of the building
    (B) 10% of the value of retained external walls
    (C) 20% of the rehabilitation costs if building is residential, 10% if commercial
    (D) 20% of the cost of qualified rehabilitation

15. To qualify for a low-income housing tax credit, the project must meet certain set-aside requirements
  generally defined as
    (A) 20 to 40 percent of the available rental units must be occupied by persons meeting low-
        income standards
    (B) set-aside requirements must be maintained for at 1east the first full year of occupancy
    (C) set-aside requirements may be waived after ten years
    (D) 50 to 60 percent of the available rental units must be occupied by persons meeting low-
        income standards
16. The low-income housing tax credit may be claimed on
    (A) all housing that is dedicated and occupied by low-income persons
    (B) only new construction that is occupied by low-income persons
    (C) only those expenditures that meet the requirements for qualified basis of a low-income
        housing project
    (D) only a project owner's income that exceeds $25,000 per year

17. In a tax-deferred exchange of real property, all of the following are classed as unlike property
    (A) cash
    (B) other property
    (C) out-of-state real property
    (D) net loan relief

18. The tax rules that apply to an installment sale are generally intended to allow
    (A) a deferral of all taxes until a final payment is made
    (B) the payment of taxes due as the money is received
    (C) an exclusion from capital gains taxes
    (D) a simplified method of calculating taxes due

19. Interest charged on installment notes is subject to IRS adjustment for tax reporting to not less than
  which of the following?
    (A) the current market rate ,
    (B) the monthly average U.S. Treasury bill rate
    (C) the bank imputed interest rate
    (D) the IRS determined Applicable Federal Rates

20. Generally, business 1osses cannot be deducted if they exceed the amount a taxpayer has at-risk,
    which is the sum of three of the following contributions to the business EXCEPT
    (A) borrowed money for which the taxpayer is not personally liable (non-recourse debt)
    (B) cash
    (C) the adjusted basis of other property
    (D) borrowed money for which the taxpayer is personally liable.

21. A distinct difference between the Sub-S and LLC forms of real estate ownership is:
    (A) the Sub-S itself pays no income tax, whereas the LLC does
    (B) each LLC shareholder has unlimited liability for all LLC debt, whereas the Sub-S shareholder
        does not
    (C) A corporation may be a shareholder in an LLC, but not in a Sub-S
    (D) an interest in an LLC cannot be easily sold

22. An S corporation offers a special advantage not available to a regular C corporation, which is that it
    (A) pays no corporate tax
    (B) pays no dividends
    (C) has no corporate indebtedness
    (D) is not required to hold stockholder meetings
Part II: Please provide complete responses to the questions below in the spaces provided.

1. A 10,000 square foot strip center leases for $9 per square foot per year. It is expected to have
   vacancies and bad debts of 10% of potential gross rents, and operating expenses of 30% of effective
   gross income. (Be careful!). It is being purchased for $900,000 with $200,000 down and a mortgage
   on the balance at 6% for 25 years. For 5 points each, what is this property’s CFBT, EDR and DSCR?

 90,000 = PGI                            700,000       PV
(9,000)                                  .5            I/Y
 81,000 = EGI                            25x12=        N
(24,300)= operating expenses             CPT PMT =     -4,510 x 12 = DS = 54,120
 56,700 = NOI                            DSCR = NOI/DS = 1.05
(54,120)                                 EDR = 2,580/200,000 = 1.3%
  2,580 = CFBT

2. Using the data in number 1 above, what is the CFAT for the property in this first year assuming 80%
of the cost is depreciated over 39 years straight line? Assume the taxpayer has a tax rate of 40%. (6

CFAT = CFBT - Taxes
Taxes = (NOI – DEPR – INT)Tax Rate
NOI = 56,700
DEPR = .8(900,000)/39 = 18,461
INT = 41,661 (from 2nd AMORT, P1 = 1, P2 = 12, etc etc)
CFAT = (56,700 – 18,461 - 41,661).4 = a negative 1,368, a tax shelter!

CFAT = CFBT – taxes = CFBT –(-(1,368) = 2,580 + 1,368 = 3,948

3. The seller of a property that cost her $200,000 is selling for $2 million. Nice sale! $1.8 million capital
gain! We like those. If she takes a 20% down payment, and holds a purchase money mortgage for the
balance at 6% for 20 years, what is her capital gains tax at closing? (7 points) and what is her capital
gains tax over the first year of the mortgage? (another 7 points). Hope you studied your review session
notes! Assume a capital gains tax rate of 15%.

    a) Down PMT CG Tax     = (CGain/selling price) x (20% x $2m) x 15%
                   = ((2 m - .2m)/2m) x (.2 x 2m) .15
                   = .9 x $400,000 x .15 = $54,000

    b) First, the mortgage:  .8 x $2m                     = PV
                             20 x 12                      =N
                             6/12                         = I/Y
                             CPT PMT                      = -$11,463
                2 Amort, P1 =1, P2 = 12, PRN              = -$42,717

        Then, the CG Tax: CG Tax Year 1 = CG percentage of sale price x PRN x CG Tax Rate

                                 = .9 x $42,717 x .15     = $5,767
4. Jill has decided to sell her old warehouse that cost her $500,000 and now has a basis of $300,000. She
is selling it for $1.2 million. If she buys a replacement property under the terms of Section 1031 of the
Internal Revenue Code, and pays $2 million for the replacement property, what will her basis on the new
property be after the transaction and tax-deferral is complete? (6 points)

New Basis is the purchase price minus the deferral:

        = $1.2m – deferral
Deferral = Sale Price – Basis = $1.2 - $.3m = $900,000

New Basis = $2m - $.9m = $1.1m

5. Now, what if Jill from problem 4 above decides to take $200,000 in “boot” from her sale of her old
   warehouse, reinvesting only $1 million. What is her tax on the boot assuming a 15% capital gains tax
   rate? (6 points)\

Boot tax = CG Tax Rate x Boot = .15 x $200,000 = $30,000

6. Now, finally, simply list 5 of the tax advantages of real estate ownership and real estate investment.
(10, very generous, points!)

From the chapter 7 notes in your course packet and on the web

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