ACOUNTING AND TAXATION ASSIGNMENT
- ( T or F ) The holding period describes the length of time that an asset is held. If the holding period is less than 12 months, a taxpayer cannot get a preferential capital gain tax rate.
- ( T or F ) A general partnership can be taxed as a corporation if elected under the check the box rules.
- ( T or F ) A corporation is subject to double tax, so every type of investor must pay two levels of tax (both corporate tax and tax on dividends) when a corporation is used for real estate investment transactions.
- ( T or F ) A REIT is taxable as a corporation that gets the benefit of a deduction for dividends paid.
- ( T or F ) A net passive loss that is limited on an individual’s income tax return in one year can be carried forward and deducted in future tax years.
- ( T or F ) A real estate professional who incurs losses on rental real estate activities where (s)he materially participates may deduct those losses against wages and other sources of active income.
- ( T or F ) The same real estate asset may produce ordinary income in the hands of one taxpayer but produce capital gains in the hands of a different taxpayer with a different intent.
- ( T or F ) The portfolio interest exception is a rule that allows non-U.S. persons to invest in certain U.S.-issued debt obligations without causing the interest income on such debt obligations to be subject to FDAP or any other U.S. tax.
- ( T or F ) Assuming that it is not pension-held, a tax exempt investor will never have UBTI on dividend income from a REIT.
- ( T or F ) An entity would not lose its REIT status because a single pension fund owns 99% and the remaining 1% is owned by 125 preferred shareholders
- ( T or F ) An individual who directly owns real estate and earns net rental income for the tax year January 1 – December 31, 2018 will have an effective tax rate of 6% on it.
- ( T or F ) REITs require a certain percentage of income that is considered rents from real property, therefore, mortgages secured by real property can never be held in a REIT.
- For each of the following income types, indicate the tax rate (if any) that would apply to a US individual:
“C” = Capital gain tax rate
“O” = Ordinary tax rate
“N” = No tax
____. Gain on sale of land held for over a year where the taxpayer is considered a dealer in land.
____. Gain on sale of a single condominium unit to a customers that was held for investment and rented for multiple years before the sale.
____. Unrealized appreciation in the value of real estate held.
____. Gain on the sale of stock held for less than one year.
____. Income earned from a management company.
- Identify the following as “ECI” (effectively connected income) or “Not ECI” (not effectively connected income) if earned by a foreign person:
Interest income from loans to U.S. corporate borrowers.
Dividends from a US corporation.
A gain on the sale of a shopping center located in Russia.
Rental income from an actively managed storage center in Florida.
Rental income from an actively managed commercial property in New York.
- John is an individual and is not a real estate professional and he does not materially participates in Partnerships A or John is a limited partner in both of these two real estate partnerships. Partnership A produces a passive loss of $5,000 (allocated to John). Partnership B produces passive income of $3,000 (allocated to John). How does John treat the income/(loss) on his tax return?
- Deduct $2,000 net
- Recognize income of $3,000 and don’t deduct losses of $5,000.
- Recognize no income or
- Deduct $5,000 loss but don’t recognize $3,000
- None of the
- A particular parcel of real estate (land) is sold for $20,000,000 and was originally purchased for $10,000,000. On a taxable sale, explain a circumstance (type of investor, intent, entity, ) that would pay the following U.S. federal income tax results on the $10,000,000 gain (exclude the 3.8% net investment income tax and any state taxes in the calculation):
- No tax liability on the sale
- $2,000,000 of tax
- $2,960,000 of tax
- $2,100,000 of tax
- Describe two examples of the type of income that could be earned from a real estate investment that would be taxed to a non-US investor as FDAP:
- Describe two examples of the type of income that could be earned from a real estate investment that would be taxed to a non-US investor as ECI:
- When a taxpayer is considered a “dealer” in real estate, there can be negative consequences. Please describe the negative consequences for the following entities:
U.S. Individual ______________________________________________________________
Tax-exempt organization (e.g.pension)___________________________________________
- Indicate below whether each activity would be nontaxable or taxable (subject to UBTI) for a tax exempt investor:
“U” = subject to UBTI
“N” = nontaxable
_____ Hotel operations income
_____ Condominium sales in the ordinary course of a business
_____ Interest income on a loan
_____ Daily parking fees for customers who may or may not be tenants
_____ Ordinary dividends from a REIT
- A U.S. individual investor held a real estate asset (a parcel of land) that that was purchased for $10,000,000, then held for 10 years. Now, the individual will sell it for $30,000,000.
- Compute the tax on the sale if the land is held directly by the investor __________________
- Compute the tax on the sale to the investor if land is held in a corporation (consider both entity tax and tax on the distributions) _______________________
- Compute the tax on the sale to the investor if the land is held in a REIT (assume that the REIT met requirements for REIT status in all years and consider both entity tax and tax on distributions)
- A U.S. tax-exempt entity investor held a real estate asset (a parcel of land) that that was purchased for $10,000,000, was held for 10 years, and will now be sold for $30,000,000. At the time of the sale, there was $5,000,000 outstanding on a loan used to acquire the land (ignore interest accruals or payments of any kind for this question).
- Compute the tax on the sale assuming that the investor was a pension plan (a qualified organization) and held the asset directly __________________
- Compute the tax on the sale assuming that the investor was a private foundation (a non-qualified organization) and held the asset directly __________________
- Compute the tax on the sale assuming that the investor was a pension plan (a qualified organization) and held the asset through a partnership that violated the fractions rule __________________
- Compute the tax to the investor if held the asset through a corporation (consider both entity tax and tax on the distributions) _______________________
- Compute the tax to the investor if held through a REIT (assume that the REIT met requirements for REIT status in all years and consider both entity tax and tax on distributions)
- A non-U.S. corporate entity investor held a real estate asset (a parcel of land) that that was purchased for $10,000,000 for 10 years and will sell it for $30,000,000. The investor gain on the sale of the asset is considered to in a business that is effectively connected to a U.S. trade or business (ECI).
- Compute the tax on the sale assuming that the investor held the asset directly
- Compute the tax to the investor if held through a corporation (consider both entity tax and tax on the distributions) with no treaty rates and a plan of liquidation in the year of sale
- Describe a way in which the tax in item b) could be potentially lower
- What are the highest tax rates for each of the following income types:
____. ECI earned by a foreign corporation
____. FDAP earned by a foreign corporation
____. Ordinary income earned by an U.S. individual
____. Capital gain earned by an U.S. individual
____. Ordinary income earned by a U.S. corporation
____. Capital gain earned by an U.S. corporation
____. Depreciation recapture on the sale of U.S. real estate (Section 1250 property) for an individual
- Matching: Place the number below next to the corresponding business entity being described:
ECI FDAP FIRPTA
Portfolio Interest Branch Profits Tax
- Exception from FDAP withholding on interest income from certain portfolio debt
- 30% withholding tax on passive-type income (interest, dividends, .).
- 30% tax imposed on a foreign corporation based on a deemed distribution of US branch
- Imposed on 1980 by the Foreign Investment in Real Property Tax
- A withholding tax on income that is effectively connected with a United States trade or
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