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The U.S. income tax system is based on the idea of voluntary compliance, which means that individuals do all of the following, EXCEPT:
1. calculate their tax liability correctly.
2. file a tax return on time.
3. report only a portion of their income.
4. report their income freely and voluntarily.

When can a taxpayer deduct a loss from the sale or exchange of personal-use property?
1. The loss on personal-use property is not deductible.
2. The loss is deductible if it less than $10,000.
3. The loss is deductible if the personal-use property is a noncapital asset.
4. The loss is a credit—not a deduction.

The Internal Revenue Code (IRC) is enforced by the Internal Revenue Service (IRS), which:
1. acts as an advisory commission.
2. is an independent agency.
3. is a Bureau in the Commerce Department.
4. is a Bureau in the Treasury Department.

A tax imposed by government on the annual gains of a person or other taxable entity derived through work, business pursuits, investments, property dealings, and other sources, is called a(n):
1. capital gains tax.
2. income tax.
3. gift tax.
4. value added tax.

Why are many consumers not aware of excise taxes that they may be paying?
1. Excise taxes can only be charged by sellers in private transactions.
2. Excise taxes are “hidden” because they are included in the price of products.
3. Excise taxes are only imposed on imported products.
4. Consumers rarely look at their receipts.

Which of the following statements regarding property taxes is NOT true?
1. Property tax is a tax levied against commercial property.
2. Property tax is a tax levied against real property.
3. Property tax on real estate is a main source of financing for school districts.
4. Property taxes tend to be progressive.

For federal income tax purposes, income is classified as active, portfolio, and passive. Income generated by a rental activity (provided the investor is not a real estate professional) or a business in which the investor does not materially participate, is called:
1. active income.
2. earned income.
3. passive income.
4. portfolio income.

According to the IRC, what is defined as all income from whatever source derived?
1. Exempt income
2. Gross income
3. Adjusted income
4. Taxable income

The Taxpayer Relief Act of 1997, allowed homeowners who sell their main homes to exclude $250,000 ($500,000 for married couples filing jointly) from capital gains. How did the 2017 Tax Cuts and Jobs Act (TCJA) impact this exclusion?
1. The TCJA increased the amounts to $400,000 and $800,000.
2. The TCJA decreased the amounts to $150,000 and $300,000.
3. The TCJA removed the exclusion in its entirety.
4. The TCJA did not affect or change the exclusion.

You usually realize gain or loss when property is sold or exchanged. The amount that you realize from a sale or exchange of property that is more than its adjusted basis, is called:
1. basis.
2. gain.
3. loss.
4. depreciation recapture.
The taxable portion of the profit from a sale is called:
1. recognized gain.
2. unrealized gain.
3. assessed gain.
4. ordinary gain.
The original value of an asset for tax purposes that is increased by items such as the cost of improvements that add to the value of the property, and decreased by items such as depreciation and casualty losses, is called:
1. basis.
2. adjusted basis.
3. taxable gain.
4. depreciation recapture.
For federal income tax purposes, income is classified as active, portfolio, and passive. Examples of active income include all of the following, EXCEPT:
1. commissions.
2. bonuses.
3. rental income.
4. wages.
The gain received from the sale of depreciable capital property that must be reported as ordinary income is called:
1. appreciation.
2. depreciation.
3. depreciation recapture.
4. unrealized gain.
Personal income tax and estate tax are examples of a:
1. flat tax.
2. proportional tax.
3. progressive tax.
4. regressive tax.
Tax deductions and tax credits can help reduce a taxpayer’s overall income tax liability. Which statement is INCORRECT regarding tax credits and tax deductions?
1. A tax credit is always worth more than a dollar-equivalent tax deduction.
2. Tax credits directly reduce the amount of tax owed.
3. Tax deductions reduce the amount of income that is subject to taxation.
4. Tax deductions and credits are exactly the same.
Created under the Tax Reform Act of 1986, the LIHTC accounts for the majority of:
1. subsidies to farmers who plant corn for biofuel.
2. affordable dormitories for college students.
3. affordable rental housing.
4. subsidies to fisheries to promote sustainability of fish stocks.
Generally, a taxpayer may use passive activity losses only to offset:
1. active income.
2. earned income.
3. passive income.
4. portfolio income.
The federal tax code includes all of the following, EXCEPT the:
1. Internal Revenue Code.
2. IRS revenue rulings.
3. SEC Rules.
4. Treasury Regulations.
For taxpayers who itemize deductions, the 2017 Tax Cuts and Jobs Act (TCJA) caps state and local tax deductions at:
1. $5,000.
2. $10,000.
3. $17,500.
4. 20% of adjusted gross income.
Before the passage of the Tax Reform Act of 1986, wealthy individuals frequently offset their earned income:
1. with capital gains from the sale of stock.
2. by purchasing Treasury Bills.
3. with losses from tax shelters, such as real estate limited partnerships.
4. by hiring family members and paying them a salary.

Almost everything owned and used for personal purposes, pleasure, or investment is a capital asset. The most common capital asset owned by taxpayers is:
1. gold.
2. their primary residence.
3. copyrights.
4. inventory.
Which president signed the Revenue Act that created the first federal income tax, even though it was temporary?
1. Abraham Lincoln
2. Andrew Jackson
3. Theodore Roosevelt
4. Woodrow Wilson
The Winters purchased a fourplex for $350,000 with the improvements valued at $275,000. What is the amount of the depreciation deduction that they can claim each year?
1. $2,725
2. $8,975
3. $10,000
4. $12,500
For federal income tax purposes, income is classified as active, portfolio, and passive. Income or financial gains that are realized from investments are called:
1. active income.
2. earned income.
3. passive income.
4. portfolio income.
In 1943, which act did Congress pass creating the current tax withholding system that requires employers to withhold federal income taxes from employees’ wages?
1. Current Tax Payment Act
2. Soak the Rich Tax
3. Wealth Tax
4. Victory Tax
A taxpayer may have to include schedules in addition to their tax returns. What schedule is used to itemize deductions?
1. Schedule A
2. Schedule B
3. Schedule D
4. Schedule E
The three main types of taxation are proportional, progressive, and regressive. Which type of tax takes a larger percentage of the income of low-income people than of high-income people?
1. Flat tax
2. Proportional tax
3. Progressive tax
4. Regressive tax
When filing their annual income tax returns, IRS Form 1040 is used by:
1. corporations.
2. individuals.
3. partnerships.
4. trusts.
After the Revolutionary War, the federal government collected revenue by levying tariffs and excise taxes. This type of taxation is known as:
1. income tax.
2. indirect taxation.
3. adverse taxation.
4. direct taxation.
Taxpayers use actual expenses or a $/SF method to determine the deductible amount for a home office. If the $/SF method is used, the maximum allowable deduction would be:
1. $1,500
2. $1,000
3. $500
4. $300
Jack wants to buy a summer vacation home. He researches tax laws to determine how the IRS treats second homes. Which of the following is NOT true regarding IRS tax treatment for second homes?
1. A second home is a home that the taxpayer chooses to treat as a second home.
2. A second home is one that does not have any bedrooms.
3. A second home can remain unrented and even be unused by the owner.
4. A second home can be rented out occasionally.
The interest rate in the installment agreement is called stated interest and it should be a reasonable rate. If the stated interest is not a reasonable rate, the IRS may do all of the following, EXCEPT:
1. recharacterized part of the principal as unstated interest.
2. require the seller to report any unstated interest as income on the tax return.
3. not allow the buyer to deduct the unstated interest on the tax return.
4. completely disallow the installment sale.
William has two homes—one where he spends 60% of his time and the other 40%. According to the Internal Revenue Service (IRS), the home where he spends 60% of his time qualifies as his:
1. second home.
2. vacation home.
3. main home.
4. home office.
The total amount of tax debt owed by an individual, corporation, or other entity to a taxing authority, such as the IRS is called:
1. taxable gain.
2. tax benefit.
3. tax liability.
4. tax status.
Amanda, a real estate licensee, uses her home office to conduct the majority of her business. In order to qualify under the exclusive use test, Amanda’s office must meet all of the following requirements, EXCEPT:
1. a specific area must be designated as the primary place where business activities occur.
2. the home office can be a room or other separately identifiable space.
3. the home office must have a partition that isolates it from the rest of the home.
4. the home office must be used exclusively for business rather than personal use.

In an installment sale, what is reported as installment sale income?
1. Gross profit percentage of each payment
2. Basis in the property
3. Adjusted basis in the property
4. Interest income
Is it important for individuals to choose the correct filing status on Form 1040 when filing their tax returns with the IRS?
1. No, because everyone who uses Form 1040 has the same tax rate.
2. Yes, because the IRS collects data on taxpayers.
3. No, because a person’s filing status can change from one year to the next.
4. Yes, because is used to determine the amount of tax owed.
A person may be able to fully deduct points paid for a loan if the loan is secured by the borrower’s main home. The term “points” may also be called any of the following, EXCEPT:
1. discount points.
2. loan origination fees.
3. maximum loan charges.
4. mortgage insurance premiums.
John is looking to purchase a home rather than rent so he can deduct the interest he pays on a home loan. Which of the following is INCORRECT regarding tax deductions for home mortgage interest?
1. A loan used to purchase a home qualifies for tax deductions.
2. A second mortgage does not qualify for tax deductions.
3. The use of the mortgage proceeds does not determine the tax deduction.
4. The amount of the deduction depends on the amount of the mortgage.
The capital gain on a home generally is the difference between the purchase price plus capital improvements and the price when sold. Jane Darwin is a real estate broker who bought her home for $200,000. Five years later, she spent $100,000 to add a master bedroom and bath and update the kitchen. If she sold her home for $500,000 with $25,000 in closing costs, what would be her taxable gain?
1. $0, because of the Section 121 exclusion
2. $275,000
3. $200,000
4. $225,000
Installment sales and contracts for deed are similar in that they are types of seller financing. What is a main difference between an installment sale and a contract for deed?
1. Payments from the buyer are made over several years.
2. Seller typically receives a down payment in the year of sale.
3. Time when the buyer receives legal title to the property.
4. Both can be used on residential or income-producing property.
Installment sales CANNOT be used:
1. by investors.
2. by homeowners.
3. for sales that result in a loss.
4. by timeshare dealers.
A qualified home is the main home (principal residence and a second home) that has sleeping, cooking, and toilet facilities. Which of the following would NOT be considered a home according to IRS guidelines?
1. Boat
2. Condominium
3. Mobile Home
4. Tent
Baker owns a single-family property that he rents. When the tenant’s lease is up, Baker plans to move in and make the property his main home in order to be eligible for the capital gains exclusion. To qualify for this exclusion, Baker must:
1. pre-pay capital gains taxes.
2. defer capital gains taxes.
3. meet the investment and ownership tests.
4. meet the ownership and use tests.
In order to deduct real estate taxes, the homeowner:
1. must have paid them directly to the seller.
2. have a portion of the property rented to a non-family member.
3. must have paid them either at closing or to a taxing authority during the year.
4. cannot have any liens or encumbrances on the property.
An accountant is determining the amount of depreciation for a real estate investment. The accountant deducts an equal amount per year over the depreciable life of the property. What method is the accountant using to calculate these deductions?
1. Double declining balance method
2. Accrual method
3. Straight-line method
4. Credit method
A real estate broker uses an alcove off the living room as his home office. To meet the specific requirements for home office tax deductions, the broker must conduct the majority of his business activities:
1. at his clients’ homes.
2. outside of his home.
3. at his home office.
4. at a rented office.
For 2018-2025, the Tax Cuts and Jobs Act generally allows homeowners to deduct mortgage interest on mortgage debt up to:
1. $500,000.
2. $750,000.
3. $1,000,000.
4. $1,500,000.
Because the payments received from an installment sale are allocated into three parts, the income is reported on different forms. Which form is NOT used when reporting payments from installment sales?
1. IRS Form 6252 – Installment Sale Income
2. IRS Schedule A – Itemized Deductions
3. IRS Schedule B – Interest and Ordinary Dividends
4. IRS Schedule D – Capital Gains and Losses
A real estate investor is reluctant to sell her rental property due to the capital gains taxes she would incur from the sale. However, to defer the gain, she agrees to receive a down payment with the balance of the purchase price paid over several years. What is this strategy called?
1. An installment sale
2. A 1031 exchange
3. A rental agreement
4. An option contract
A real estate investor is deciding whether to invest $500,000 in a commercial property or rental property that both have the same annual gross income. The improvements on the commercial property are valued at $409,500 and on the residential property at $412,500. Which property will generate the biggest depreciation deduction for the investor?
1. It is the same for commercial and residential
2. The commercial property
3. The residential property
4. It would depend on the size of the property
Which of the following is the correct way to calculate the taxable income for an income-producing property?
1. Net operating income PLUS reserves for replacement LESS mortgage interest, depreciation, and amortization of loan costs
2. Net operating income LESS mortgage interest and depreciation
3. Gross income LESS expenses
4. Net operating income LESS expenses PLUS reserves for replacement
Three requirements must be met in order for a taxpayer to take advantage of the real estate professional exception to the passive activity loss rules. Which is NOT one of the requirements?
1. More than 50% of taxpayer’s time spent in real estate business
2. Taxpayer’s material participation
3. Taxpayer must spend 100% of his or her time in the real estate business
4. Taxpayer must spend more than 750 hours in real estate business
Brad and Betty Baker are real estate professionals who spend all of their time in their brokerage business. They also offer property management services to their investor-clients. In addition, they manage their own portfolio of income-producing properties. What should they do to be sure they are exempt from the passive activity loss rules?
1. They should post pictures of their properties on social networking sites.
2. They should encourage investors and clients to provide positive feedback on Yelp.
3. They should have written documentation of the time spent on each real estate activity.
4. Since they materially participate, they do not have to do anything else.
Under the installment method, the payments received by the seller are allocated into three parts. Which of the following is NOT reported?
1. Gain from the sale
2. Interest income
3. Loss from the sale
4. Return of the adjusted basis in the property
Investors who own rental real estate must report all rental income; however, they can offset the rental income with deductions and depreciation. It is important to keep careful records, so most individuals use the cash method of accounting. This means that they account for:
1. rental income when it is received and for expenses in the year they are paid.
2. rental income when it is received and for expenses when they are incurred.
3. rental income when it is earned and for expenses when they are incurred.
4. rental income when it is earned and for expenses when they are paid.
All of the following are allowable tax deductions for rental real estate, EXCEPT:
1. depreciation.
2. improvements.
3. necessary expenses.
4. ordinary expenses.
A person other than the taxpayer or a disqualified person who enters into an "exchange agreement" with the taxpayer is known as a(n):
1. accommodator.
2. facilitator.
3. qualified intermediary.
4. All of the choices are correct.

When you make a like-kind exchange, capital gains taxes usually can be deferred. However, if you receive boot as part of the exchange:
1. you will have a recognized gain that is taxable.
2. the IRS will disallow the transaction.
3. you will have to pay tax on the entire capital gain.
4. the recognized gain is excluded from taxes.

The term “like-kind properties” means that both the original and replacement properties must be:
1. of the same nature or character, even if they differ in grade or quality.
2. identical.
3. commercial property.
4. income-producing residential property.

To qualify for an exchange, both the relinquished property and the replacement property must be property:
1. held for personal use.
2. used as inventory for broker/dealers.
3. held for investment or productive use.
4. used as a vacation home.

The potential like-kind replacement properties must be identified to the qualified intermediary within the identification period deadlines. Which of the following is NOT one of the like-kind replacement property identification rules?
1. 3-property rule
2. 95% exception rule
3. 100% rule
4. 200% rule

Who are the parties to a delayed exchange?
1. Seller, buyer and qualified intermediary
2. Seller, lender, and settlement agent
3. Seller, buyer and lender
4. Seller, buyer and title company

In an exchange transaction, what happens if the seller receives cash or unlike property, either actually or constructively?
1. The IRS will disallow the 1031 tax treatment.
2. The transaction would be treated as an outright sale of the relinquished property and a purchase of the replacement property.
3. The seller would be required to recognize gain or loss on the transaction.
4. All of the statements are correct.

For an exchange not to be taxed, how much of the proceeds from the sale of the relinquished property must be reinvested in the replacement property?
1. 100%
2. 75%
3. 50%
4. 25%

The amount of gain you make from selling an asset is called:
1. adjusted gain.
2. recognized gain.
3. realized gain.
4. ratable gain.

A real estate investor is reluctant to sell her property to a buyer due to the capital gains taxes she would incur from the sale. However, she agrees to exchange her property for something similar to defer the gain. What is this strategy called?
1. An installment sales contract
2. A 1031 exchange
3. A rental agreement
4. An option contract
Using the sale proceeds from an exchange to pay for closing expenses can result in boot. Which of the following expenses CANNOT be paid from the proceeds of the sale and must be paid in cash to avoid boot?
1. Broker’s commission
2. Escrow fees
3. Property taxes
4. Qualified intermediary fees
A simultaneous exchange must occur at the same time, because:
1. title companies only handle exchanges two days a month.
2. any delay can disqualify the exchange.
3. it is hard to get everyone together to close the transaction.
4. lenders who make loans on exchanged properties require it.
To be sure that an exchange is a 100% tax-deferred exchange instead of a partially-deferred exchange, an investor should never accept:
1. boot.
2. cash.
3. money.
4. any of the above.
In order to defer the payment of capital gains tax, you must adhere to the IRS rules and procedures for 1031 exchanges. To avoid unintended tax consequences, you must:
1. buy a replacement property whose purchase price less than the relinquished property.
2. get a loan on the replacement property that is less than the loan on the relinquished property.
3. reinvest all cash proceeds into the replacement property.
4. use some of the cash proceeds to purchase the replacement property.
What happens if the exchanger does not identify like-kind replacement properties within the identification period window?
1. Nothing happens, the transaction continues.
2. The exchanger pays the IRS a penalty fee for missing the deadline.
3. The transaction would be re-characterized as a taxable sale transaction.
4. The person simply asks for an extension of time
A 1031 exchange allows the payment of tax on a capital gain from the sale of real property to be:
1. waived.
2. exempted.
3. excluded.
4. deferred.
A provision in a law or agreement that will protect a person from any liability or penalty as long as set conditions have been met, is known as a:
1. asylum.
2. refuge.
3. safe harbor.
4. sanctuary.
Dan owns a triplex free and clear (no mortgage) with an adjusted basis of $120,000 and a fair market value of $200,000. Mary owns a fourplex (also with no mortgage) that has a fair market value of $180,000. Dan exchanges his triplex for Mary's fourplex. Mary pays Dan $20,000 in cash to balance the equities. What is Dan’s recognized gain in the exchange?
1. $20,000
2. $60,000
3. $80,000
4. $100,000
In order do a tax-deferred exchange, you must follow the Internal Revenue Code rules regarding all of the following, EXCEPT:
1. qualifying property rules.
2. financing rules.
3. timing rules.
4. identification rules.
Karen is exchanging her strip mall for a smaller strip mall plus boot. Which of the following would be considered boot in this exchange?
1. Small commercial building
2. 10-year leasehold
3. 30-year leasehold
4. Duplex
One of the main challenges of successfully completing a 1031 exchange is identifying a suitable replacement property within the identification period. Because of this, the IRS allows:
1. a Delaware Statutory Trust to serve as a replacement property.
2. a REIT to serve as a replacement property.
3. exchangers to ask the IRS for an extension of time for the identification period.
4. personal property to serve as a replacement property.
In order for the transaction to be considered a 1031 exchange, the taxpayer must complete the transaction during the exchange period. How long is the exchange period?
1. 1 month
2. 30 calendar days
3. 3 months
4. 180 calendar days
Which is NOT one of the four safe harbor arrangements for delayed exchanges listed in the Treasury regulations?
1. Qualified Intermediaries
2. Experienced Go-betweens
3. Security or Guarantee Arrangements
4. Qualified Escrow Accounts or Qualified Trusts
Boot is used in an exchange to balance the equities. Which of the following is NOT a type of boot?
1. Cash
2. Like-kind property
3. Non-like-kind property
4. 25-year leasehold
The common ways to structure 1031 exchanges include all of the following, EXCEPT:
1. delayed exchange.
2. coincident exchange.
3. reverse exchange.
4. simultaneous exchange.
An investor who acquires the like-kind replacement property first, and then subsequently sells his or her relinquished property is using:
1. delayed exchange.
2. construction exchange.
3. reverse exchange.
4. simultaneous exchange.
Tom owns a building with a $125,000 mortgage and an adjusted basis of $120,000. The fair market value is $220,000. If he sold the property for $200,000, what is his realized gain?
1. $75,000
2. $80,000
3. $95,000
4. $100,000
Which of the like-kind replacement property identification rules is used in most 1031 exchange transactions?
1. 3-property rule
2. 95% exception rule
3. 100% rule
4. 200% rule
The identification period deals with designating the potential like-kind replacement property and begins on the date the seller sells his or her relinquished property. What is the deadline for the identification period?
1. 45 days from the date the relinquished property is sold.
2. 45 calendar days from the date the relinquished property is sold.
3. 45 business days from the date the relinquished property is sold.
4. No later than midnight of the 45th calendar day from the date the relinquished property is sold.
A tax strategy in which a third party, known as the accommodation party (exchange accommodation titleholder), temporarily holds title to a real estate investor's relinquished or replacement property is known as a(n):
1. Delaware Statutory Trust.
2. Foreign Property Exchange.
3. Qualified Exchange Accommodation Arrangement.
4. Starker exchange.
How does a cash basis taxpayer report rental income and expenses?
1. Rental income when it is earned. Expenses when they are incurred.
2. Rental income when it is earned. Expenses when they are paid.
3. Rental income when it is received. Expenses when they are incurred.
4. Rental income when it is received. Expenses in the year they are paid.

Which of the following properties would NOT qualify for a like-kind exchange?
1. Apartment building
2. Commercial building
3. Land
4. Personal residence

What is another name for a 1031-delayed exchange?
1. Concurrent exchange
2. Simultaneous exchange
3. Starker exchange
4. Two-step exchange

Because of the Taxpayer Relief Act of 1997, individuals can withdraw money, penalty free, from their IRAs to:
1. invest in a Real Estate Investment Trust (REIT).
2. buy their first home.
3. remodel a home they already own.
4. invest in commercial property.

In September 2000, the IRS issued Revenue Procedure 2000-37, 2000-2 C.B. 308, which provided _________________ for completing reverse exchanges.
1. Revised tax requirements
2. A safe harbor
3. New deadlines
4. A revised form

Which federal agency is responsible for the determination, assessment, and collection of taxes?
1. Franchise Tax Board
2. Federal Reserve Board
3. Internal Revenue Service
4. Bureau of Fiscal Service
Provided the taxpayer is not a real estate professional, income from a rental activity is considered:
1. active income.
2. earned income.
3. non-passive income.
4. passive income.
A transaction is considered ______________ when you have received title to the like-kind replacement properties that you intend to acquire.
1. Pending
2. Preliminary
3. Static
4. Complete
1031 exchange due dates can be extended in the case of _______________________.
1. Financial hardship
2. Presidentially-declared disasters
3. Life-threatening illness
4. A rejected financial report
Of the following expenses, which can a homeowner deduct?