Question 1

The main disadvantage of the partnership structure for holding real estate is:

Accepted Answer

The main disadvantage of the partnership structure for holding real estate is personal liability. In a partnership, each partner is individually and jointly liable for any debts or liabilities incurred by the partnership. This means that if the partnership is sued or goes bankrupt, the partners' personal assets are at risk. This can be a significant disadvantage for investors who want to limit their exposure to risk.

Question 2

The main disadvantage of the S-corporation form of ownership is:

Accepted Answer

The main disadvantage of the S-corporation form of ownership is its limited access to capital markets. S-corps are restricted to a maximum of 100 shareholders, and they cannot issue different classes of stocks like common and preferred stocks. This makes it difficult for S-corps to raise significant amounts of capital compared to larger companies with access to capital markets. Tax regulations and issues of liability are not significant disadvantages of S-corps as they also affect other forms of ownership like C-corps and LLCs.

Question 3

20-17.To qualify for REIT status it must be managed by:

Accepted Answer

C

Question 4

The main determinants of the form of ownership for real estate are:

Accepted Answer

The main determinants of the form of ownership for real estate include income tax laws, issues of liability, and access to capital markets. These factors influence decisions on how to structure ownership to optimize financial and legal outcomes.

Question 5

The main disadvantage of the C-corporation form of ownership is:

Accepted Answer

The main disadvantage of the C-corporation form of ownership is double taxation, which falls under tax regulations. Profits are taxed at the corporate level and then again at the individual level when distributed as dividends to shareholders.

Question 6

20-18.The individual who owns real estate in his or her name holds it as:

Accepted Answer

Real estate owned solely by an individual is considered sole ownership, as opposed to being owned by a partnership, corporation, or in a community property state.

Question 7

20-10.The best form of ownership for large-scale real estate investments is:

Accepted Answer

Both publicly traded partnerships and REITs offer advantages for large-scale real estate investments. Publicly traded partnerships offer tax benefits and the ability to raise capital through public markets, while REITs offer diversification and potential steady income through rental revenue. Combining these two ownership structures can provide even greater benefits for investors. C-corporations may also be a viable option, but they come with a higher tax burden and less favorable treatment for real estate investments.

Question 8

20-16.An IRS code criteria for a REIT to qualify as a tax-free entity is:

Accepted Answer

The IRS criteria for a REIT to qualify as a tax-free entity is that it must derive at least 75% of its gross income from real estate related investments. The other options (A, B, and D) are not accurate criteria for REITs.

Question 9

20-19.Under passive loss limitation rules the limit of annual operating losses from a commercial real estate property that can be used to offset other positive income for the sole owner is:

Accepted Answer

The limit of annual operating losses from a commercial real estate property that can be used to offset other positive income for the sole owner is $25,000 under passive loss limitation rules, as per the current IRS guidelines. Therefore, option D is the correct answer.

Question 10

The following is a type of REIT:

Accepted Answer

REITs (Real Estate Investment Trusts) can be classified into three main types: equity REITs, which own and manage real property; mortgage REITs, which provide financing for real estate by purchasing or originating mortgages and mortgage-backed securities; and hybrid REITs, which combine the investment strategies of equity REITs and mortgage REITs. Therefore, all of the options listed (equity, mortgage, and hybrid) are types of REITs.

Question 11

20-11.The form of ownership that provides the maximum control over the management of real estate property is:

Accepted Answer

A sole proprietorship provides maximum control over the management of real estate property because the owner has complete authority to make decisions and manage the property without having to consult with other shareholders or partners. However, this form of ownership also exposes the owner to unlimited personal liability for any debts or legal issues arising from the property.

Question 12

20-14.A characteristic that does NOT distinguish a partnership from a corporation is:

Accepted Answer

Tax status is not a characteristic that distinguishes a partnership from a corporation. Partnerships and corporations are taxed differently, but this is not a characteristic that distinguishes them from each other.

Question 13

The main disadvantage of the sole proprietorship form of ownership is:

Accepted Answer

The main disadvantage of the sole proprietorship form of ownership is issues of liability. As the sole proprietor has unlimited liability, he/she is personally responsible for all the debts and obligations of the business. This means that if the business cannot pay its debts or faces legal action, the owner's personal assets may be at risk. This is in contrast to other forms of ownership, such as corporations, where the owners have limited liability and their personal assets are protected.

Question 14

The following is NOT a factor that determines the best form of ownership for real estate:

Accepted Answer

Future inflation expectations do not directly determine the best form of ownership for real estate. The other options (use of debt financing, passive loss limitations, desire to retain earnings) are all factors that can have an impact on the optimal ownership structure for real estate.

Question 15

20-15.A REIT can NOT sell a property if:

Accepted Answer

A REIT (Real Estate Investment Trust) can sell a property regardless of the duration it has held the property, the number of properties it has sold during the year, or whether it acquired the property through foreclosure. These factors do not inherently restrict a REIT's ability to sell a property.

Question 16

In 1960 Congress created the REIT structure to:

Accepted Answer

Congress created the REIT structure in 1960 to eliminate double taxation problems faced by real estate investors. REITs are exempt from paying taxes on their income as long as they distribute at least 90% of their profits to shareholders in the form of dividends, which are then taxed at the individual shareholder level. This eliminates the double taxation issue where the profits are taxed at both the corporate and individual level.

Question 17

The following ownership structures can be used to hold real estate:

Accepted Answer

All of the above ownership structures can be used to hold real estate, but the optimal choice would depend on the specific circumstances of the situation. A sole proprietorship may be suitable for a single owner who wants full control and responsibility for the property, while a corporation can provide liability protection and a favorable tax structure. A partnership may be ideal for multiple owners who want to share control and split profits. Ultimately, the best choice would depend on factors such as the size and complexity of the property, the number of owners involved, and the desired level of control and liability protection.

Question 18

20-12.REITs that invest in both equity properties and mortgages are called:

Accepted Answer

REITs that invest in both equity properties and mortgages are commonly known as hybrid REITs. They invest in a combination of real estate properties and mortgage loans, providing investors with a diverse portfolio of investments. This type of REIT is a popular choice among investors seeking a balance of income and capital appreciation. The other options (combination REITs and dual purpose REITs) are not commonly used terms to describe this type of REIT.

Question 19

20-20.The form of property ownership that suffers from double taxation is:

Accepted Answer

C-corporation is the form of property ownership that suffers from double taxation, where the corporation's earnings are taxed at the corporate level, and then shareholders are taxed again on any distributed profits. Sole ownership and partnership are taxed only at the individual level.

Question 20

20-13.A form of ownership structure for real estate that does NOT allow for personal liability is:

Accepted Answer

Limited partnerships and corporations both offer structures where owners or investors have limited personal liability for the debts and actions of the entity.

Quiz 20: Ownership Structures for Financing and Holding Real Estate