Question 1

When the sale of a passive activity produces a capital loss and unused passive losses from previous years remain,the unused losses can be used to offset any other source of income.

Accepted Answer

This is true according to the rules laid out in the Internal Revenue Code Section 469. If a passive activity generates a capital loss, that loss can be used to offset any other source of income, and any remaining unused passive losses from previous years can also be used to further offset income.

Question 2

Residential property is depreciated over 27.5 years where as non-residential property is depreciated over 31.5 years.

Accepted Answer

This statement is correct. According to the IRS, residential rental property (buildings with 4 or fewer units) is depreciated over 27.5 years, while non-residential property (such as office buildings) is depreciated over 31.5 years.

Question 3

Property held as a personal residence cannot be depreciated.

Accepted Answer

This is because a personal residence is not used for business or income-producing purposes, and therefore does not qualify for depreciation.

Question 4

When calculating the adjusted IRR the cash flows are always discounted to a present value at a safe rate.

Accepted Answer

When calculating the adjusted IRR, the cash flows are discounted at the project's required rate of return, which may not necessarily be a safe rate.

Question 5

If an individual actively participates in the management of a rental property,he may deduct the full amount of the passive activity losses from active income,regardless of his adjusted gross income.

Accepted Answer

The ability to deduct passive activity losses from active income is limited and subject to certain conditions, such as participation level and income thresholds. Active participation in management may allow some losses to be deducted, but there are caps and phase-outs based on the individual's adjusted gross income.

Question 6

The deductibility of depreciation to calculate taxable income will usually cause the effective tax rate to be lower than the actual tax rate.

Accepted Answer

Depreciation reduces the taxable income which in turn reduces the tax liability, resulting in a lower effective tax rate than the actual tax rate.

Quiz 11: Investment Analysis and Taxation of Income Properties