Question

15.      You have purchased a duplex property for $275,000. The property’s assessed value was $200,000, of which $140,000 is for improvements and $60,000 is for land. The property was purchased on the first day of the tax year. What is the cost recovery for the year of acquisition?

a. 4,000
b. 6,709
c. 5,156
d. 275,000

16.       Cost Recovery Deduction depends on the useful economic life of an asset defined by the IRS. The class life of residential real estate improvements is:

a. 39.0 years
b. 37.5 years
c. 27.5 years
d. 29 years

17.       The straight-line cost-recovery method uses this calculation:

a. 100/29
b. Original Basis (100%) / Class Life
c. Year of acquisition /39 years
d. Original Basis / 15^th of the month

18.       Taxable income for an improved property which has no financing is determined by:

a. Subtracting the operating expenses from the gross operating income
b. Subtracting the vacancy rate from the Potential Rental Income
c. Subtracting the operating expenses and the cost recovery deduction from the gross operating income
d. Multiplying the sales price by the cap rate

19.       Find the Adjusted Basis using the following figures:
            Original Basis is $2,000; Capital Improvements are $700; Cost Recovery Taken is $400  

Answer: ___________________

20.       Straight-line cost recovery is taxed at ordinary income rates up to a:

a. Max of 20%
b. Max of 30%
c. Max of 25%
d. Max of 50%

21.       In the Arkansas Apartments Discounted Cash Flow Assumption Data, the total Assessed Value is:

a. 1,300,000
b. 700,000
c. 300,000
d. 1,000,000

22.      In the Arkansas Apartments Discounted Cash Flow Assumption Data, the capital gains tax rate is:

a. 25%
b. 37%
c. 20%
d. 15%

Answer 1

15. Answer - (d) 2,75,000

Explanation - Cost recovery refers to the deduction of a portion of the cost of the duplex property, over its useful life through depreciation, amortization, or depletion. ... have a useful life greater than 1 year.

16. Answer - (c) 27.5 years.

Explanation - Residential real estate has an IRS-determined useful life of 27.5 years, while commercial real estate has a useful life of 39 years.

17. Answer - (b) Original Basis (100%) / Class Life

Explanation - Under this method, the same amount of depreciation is deducted from the value of an asset for every year of its useful life.

18. Answer - (c) Subtracting the operating expenses and the cost recovery deduction from the gross operating income.

19. To calculate the Adjusted Basis, its purchase price has to be taken and then add or subtract any changes to its initial recorded value.

Hence Adjusted Basis =  Original Basis of $2,000 + Capital Improvements of $700

= $2700.

20. Answer - (a) Max of 20%

Explanation - Considering the useful life of an asset to be 5 years, the maximum straight-line cost recovery to be taxed will be 100%/ Life of asset = 100% divided by 5 years = 20%.

22. Answer - (c) 20%

Explanation - In 2020 the capital gains tax rates are either 0%, 15% or 20% for most assets held for more than a year.