Fundamentals of Taxation 2015 8Th Edition Cruz Test Bank Full Chapter PDF

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Chapter 08
Rental Property, Royalties, and Income from Flow-Through Entities
True / False Questions
1. Rental income is generally reported on Schedule C.
True False
2. Capital improvements on rental properties may be deducted in the current year.
True False
3. A security deposit for a rental property is not reported as income.
True False
4. Residential rental properties are depreciated using the straight-line method over 27½ years.
True False
5. If a tenant pays an expense normally paid by the taxpayer (landlord) in lieu of rent (or the full
rent), that expense is not considered part of rental income to the taxpayer.
True False
6. Rental properties that are also used as vacation homes fall under one of three categories:
(1) primarily rental,

(2) primarily personal, and
(3) personal/rental.
True False
8-1
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7. If a family member of a taxpayer uses the rental property and pays full rental value, then
those days rented are considered rental days.
True False
8. In the case of personal/rental property, a taxpayer can deduct expenses only to the extent
that there is rental income.
True False
9. Jennifer's beach house rented for 175 days and used by her and her family for 15 days, is
considered personal/rental property.
True False
10. Jonathan and Sandy rented their cabin for 123 days and used the cabin for personal use for
55 days. The cabin is considered personal/rental property.
True False
11. There are two methods available to taxpayers to allocate expenses between personal and
rental use of properties.
True False
12. A property rented for less than 15 days and used for personal use the remainder of the year,
should have the rental income reported on Schedule E.
True False
13. A personal/rental property (that is not a trade or business) may report its income and
expenses on Schedule A.
True False
14. A royalty is a payment for the right to use intangible property.
True False
8-2
15. When royalties are paid, the amount paid is reported to the recipient by the payer at the end
of the year on a Schedule K-1.
True False
16. Generally, a taxpayer uses Schedule C to report royalty income.
True False
17. Royalties resulting from a non-trade or non-business activity should be reported on a

Schedule E.
True False
18. Entities such as partnerships, LLC's, and S Corporations are known as flow-through entities.
True False
19. Flow-through entities are named as such because they are taxed continuously.
True False
20. Flow-through entities supply each owner at the end of the year with a Schedule E, indicating
his/her income and expenses to report.
True False
21. Flow-through entities file "informational returns."
True False
22. The income from a partnership to its partner is considered self-employment income.
True False
23. Rental activities by definition are passive activities.
True False
8-3
24. If a taxpayer materially participates in his/her rental activity as a real estate professional, the
activity is considered a trade or business and not a passive activity.
True False
25. A taxpayer with a rental activity may be allowed up to $25,000 of rental losses against other
(active or portfolio) income.
True False
26. Rental income may be reported on a Schedule A or a Schedule C.
True False
27. All rental properties are depreciated using the straight-line method over 39 years.
True False
28. If a tenant provides service for the rental property in lieu of rental payment, the fair market
value of the service is considered rental income and must be reported as income.
True False
29. All advance rental payments received, including security deposits for a rental property, must
be reported as income when received.
True False
30. Alexis' cabin in the mountains that was rented for 125 days and used by her for 12 days is
True False
31. Joey and Susan rented their house for 2 weeks and used it for personal use for the remainder
of the year. The house is considered personal/rental property.
True False
8-4
32. Rental properties that are also used as vacation homes fall under one of two categories:
(1) primarily rental; or

(2) primarily personal.
True False
33. In the case of a primarily personal property, a taxpayer may report a net loss as long as the
correct allocation method was used.
True False
34. The two methods that may be used to allocate expenses between personal and rental use of
properties are the IRS method and the Tax Court method.
True False
35. A primarily rental property may report its income and expenses on a Schedule E.
True False
36. A taxpayer may use a Schedule C or a Schedule E to report royalty income.
True False
37. Royalty income is income received from the use of books, stories, plays, copyrights,
trademarks, etc. owned by the taxpayer.
True False
38. When royalties are paid, the amount paid is reported to the recipient by the payer on a Form
1099-MISC.
True False
8-5
39. Flow-through entities include, but are not limited to, LLCs, S Corporations, trusts and
estates.
True False
40. In general, losses from passive activities may be deducted only to the extent that there is
passive income.
True False
Multiple Choice Questions
41. On June 1 of the current year, Jack and Angie purchased a rental beach house for $900,000
and rented it right away. Of that amount, $600,000 was for the land value. How much
depreciation deduction can Jack and Angie take in the current year? (You may need to refer
to the depreciation tables.)
A. $5,910
B. $10,909
C. $11,820
D. $17,730
42. Jamison owns a rental cabin in Mammoth, and travels there for maintenance three times a
year, between January and June. The round trip to Mammoth from San Diego where Jamison
lives, is approximately 405 miles. How much travel costs can Jamison deduct per year related
to his rental cabin? (Round your answer to the nearest whole number)
A. $248
B. $680
C. $743
D. $1,352
8-6
43. Brad and Kate received $9,500 for rent from Mike and Janet, who are renting their home in
Santa Ana, California. Brad and Kate did not use this property for personal use. The rent
covers eight months from August 1 of the current year to March 31 of the following year. The
amount also includes a security deposit of $1,500. How much should Brad and Kate report as
rental income in the current tax year?
A. $1,500
B. $5,000
C. $8,000
D. $9,500
44. Georgia owns a home in Colorado that she rents for $1,200 per month (she does not use the
home personally). While she was in Europe in November, the roof in her rental home leaked
and her tenant repaired it for $900. For the following month's rent (December), her tenant
paid her $300 for rent ($1,200 - $900). What amounts should Georgia include for rental
income and repair expense, respectively, for December?
A. $300; $900
B. $900; $300
C. $1,200; $300
D. $1,200; $900
45. If a taxpayer materially participates in a real estate activity as a real estate professional, the
income and expenses of the activity should be reported on:
A. Schedule A
B. Schedule C
C. Schedule E
D. None of these
8-7
46. Naomi and Matt received the following amounts from a tenant who is renting their
condominium during the current year (rent is $1,500 per month):
Rent for two months would normally have been $3,000, but the tenant paid $800 for a
plumbing repair. The repair would normally have been paid by Naomi and Matt but the
problem occurred while they were out of town. How much should Naomi and Matt report as
rental income for the current tax year?
A. $2,200
B. $2,400
C. $3,000
D. $4,600
47. Which of the following is not considered an ordinary expense for a rental activity?
A. Advertising
B. Insurance
C. Property taxes
D. All of these are deductible as ordinary expense
48. Which of the following is not considered a capital improvement for a rental activity?
A. Addition of a bathroom
B. Replacement of the roof
C. Repair of a leaky water pipe
D. New landscaping
8-8
49. What is the proper tax treatment of capital improvements for a residential or commercial
rental property?
A. IRC section 179 may be claimed.

B. Can be deducted as ordinary expenses.
C. Must be depreciated using the double-declining balance method.
D. Must be depreciated using straight-line over 27½ or 39 years.
50. Which of the following expense items is(are) deductible as rental expense for a rental
property?
A. Travel related to the property

B. Management fees
C. Repairs and maintenance
D. All are deductible expenses
51. May owns a four-plex in Garden Grove, CA. She rents out 3 units and lives in the fourth. Her
income and expenses for the entire four-plex are as follows: mortgage interest $8,200,
property taxes $9,000, insurance $3,000, utilities $2,000, repairs and maintenance $1,000,
depreciation on the entire complex of $5,000, and rental income of $25,000. What amount of
net rental income or loss should May report on her current tax return?
A. $3,200 net loss

B. $3,850 net income
C. $21,150 net loss
D. $25,000 net income
52. A property that has been rented for 120 days and used for personal use for 13 days should be
categorized as:
A. Primarily rental
B. Primarily personal
C. Personal/rental
D. None of these
8-9
53. Charles and Sarah own a home in Palm Springs, CA. During the year, they rented the house
for 40 days for $5,000 and used it for personal use for 18 days. The house remained vacant
for the remainder of the year. The expenses for the house included $16,000 in mortgage
interest, $4,500 in property taxes, $1,000 in utilities, $1,200 in maintenance, and $9,800 in
depreciation. What is the deductible loss for the rental of their home (without considering the
passive loss limitation)? Use the Tax Court method for allocation of expenses.
A. $0
C. $17,414 net loss
D. $27,500 net loss
54. Jane and Don own a ski chalet in Lake Tahoe, NV and rented it for 12 days for $8,000. The
rest of the year, the chalet was used by them and their friends and family. What is the proper
tax treatment of the $8,000?
A. Should be reported on Schedule E

B. None of the rental income is included in gross income
C. The amount should be reported on Schedule C
D. The amount should be reported as other income on Form 1040
55. Mario owns a home in Park City, Utah, that he rented for $1,600 for three weeks during the
summer. He lived there for a total of 120 days and the rest of the year, the house was vacant.
The expenses for the home included $6,000 in mortgage interest, $900 in property taxes,
$1,300 in maintenance and utilities, and $3,500 in depreciation. How much net rental income
or loss from the Park City home would Mario report for the current year? Use the IRS method
for allocating expenses.
A. $0
C. $6,000 net loss
D. $9,100 net loss
8-10
56. In the current year, Marnie rented her vacation home for 75 days, used it for personal reasons
for 22 days, and left it vacant for the remainder of the year. Her income and expenses are as
follows:
What is Marnie's net income or loss from the activity? Use the Tax Court method.
(Round your answer to the nearest whole dollar)
A. $0
C. $11,123 net income
8-11
57. Lupe rented her personal residence for 13 days to summer vacationers for $3,800. She lived
in the home for the rest of the year. She has AGI of $95,000 excluding the rental income.
Related expenses for Lupe's personal residence for the year include these:
What is Lupe's AGI after taking into consideration the rental income and related expenses?
A. $95,000
B. $98,098
C. $98,800
D. $115,000
58. Jacqueline owns a condominium on an island in Washington which was rented out all year for
$30,000. She incurred the following expenses:
What amount of net income or loss does Jacqueline report from this rental property?
A. $0
B. $9,700 net loss
C. $20,300 net income
8-12
59. Hugh and Mary own a cabin in Big Bear that they rented for 45 days at $4,500. They used the
cabin for personal use for 30 days during the year. The allocated expenses related to the
cabin of $6,000, resulting in a net loss of $1,500 for this rental activity. What is the proper tax
treatment of these amounts by Hugh and Mary?
A. Report net income of $4,500

B. Report rental net loss of $1,500
C. None of the amounts should be reported
D. Report income and expenses on Schedule E but expenses cannot exceed income
60. Which of the following statements is not true about vacation home properties?
A. Property rented for 15 days or more and used for personal use for 14 days or less would be
categorized as primarily rental
B. A property rented for 15 days or more and used for personal use for more than 14 days
would be categorized as personal/rental
C. A property categorized as primarily personal is rented for 0 days
D. A primarily personal property does not need to report the income from the property
61. Darius and Chantal own a cabin in Lake Arrowhead, California. During the year, they rented it
for 45 days for $10,000 and used it for 12 days for personal use. The house remained vacant
for the remainder of the year. The expenses for the house included $9,000 in mortgage
interest, $2,000 in property taxes, $1,000 in utilities, $600 in maintenance, and $3,000 in
depreciation. What is their net income or loss from their cabin (without considering the
passive loss limitation)? Use the IRS method for allocation of expenses. (Round your answer
to the nearest whole dollar)
A. $0
B. $2,316 net loss
C. $5,600 net loss
8-13
62. Jeremy and Gladys own a cabin in Sun Valley, Idaho, which they rented for 30 days. They also
used the cabin with their family and friends for the ski season for 45 days. Their income and
expenses were as follows: rental income $4,000, mortgage interest $3,000, property taxes
$2,200, utilities $400, maintenance $400, and depreciation $4,800. How much depreciation
expense can they deduct on Schedule E for the cabin? Use the IRS method for allocation of
expenses.
A. $0
B. $1,600
C. $2,400
D. $4,800
63. Stephen and Joy own a duplex in Newport Beach, CA. They live in one unit and rent the other
to another couple. Their rental income for the year was $24,000. They incurred the following
expenses for the entire duplex:
What amount of net income from the duplex should Stephen and Joy report for the current
year?
A. $7,300
B. $9,400
C. $16,700
D. $24,000
8-14
64. Reggie and Bebe own an apartment building in Portland, Oregon, with 8 identical units. They
live in one and rent the remaining units. Their rental income for the year was $45,000. They
incurred the following expenses for the entire building:
What amount of net income should Reggie and Bebe report for the current year for this
rental? (Round your answer to the nearest whole dollar)
A. $7,650
B. $12,213
C. $38,350
D. $45,000
8-15
65. Nathan owns a tri-plex in Santa Maria, California. He lives in one and rents the other two
remaining units. All three units are identical. He incurred the following expenses for the entire
building:
How much in rental expenses can Nathan deduct against the rental income on a Schedule E
in the current year (without considering any passive loss limitations)? (Round your answers
to the nearest whole dollar)
A. $14,733
B. $20,000
C. $29,467
D. $44,200
66. Royalties can be earned from allowing others the right to use:
A. Books
B. Plays
C. Trademarks
D. All of these
67. When royalties are paid, at the end of the year the payer sends the recipient a Form _____?
A. Schedule C
B. Schedule K-1
C. 1099-MISC
D. 1099-INT
8-16
68. Samantha is a full-time author and recently published her 8th romance novel. She should
report the royalty income she receives from the publisher this year on what Schedule/Form?
A. Schedule C
B. Schedule K-1
C. 1099-MISC
D. 1099-INT
69. Royalties can be earned from allowing others the right to use or exploit:
A. Copyrights
B. Formulas
C. Coal mines
D. All of these
70. Which of the following statements is true with regard to the reporting of royalty income?
A. It must be reported on Schedule C only

B. It must be reported on Schedule E only
C. It can be reported on Schedule C but generally on Schedule E
D. Royalty income reported on Schedule E is subject to self-employment tax
71. Which of the following entity(ies) is(are) considered flow-through?
A. C corporation
B. Sole proprietorship
C. Publicly traded corporation
D. S corporation
8-17
72. From which of the following flow-through entities is the ordinary income (K-1) considered
self-employment income?
A. S corporations
B. Estates
C. Trusts
D. Partnerships
73. Alex, Ellen and Nicolas are equal partners in a local restaurant. The restaurant reports the
following items for the current year:
Each partner receives a Schedule K-1 with one-third of the preceding items reported to
him/her. How must each individual report these results on his/her Form 1040?
A. $100,000 income on Schedule E; $50,000 investment expense on Schedule A

B. $257,667 income on Schedule E; $50,000 investment expense on Schedule A
C. $300,000 income on Schedule E; $50,000 investment expense on Schedule A
D. $300,000 income on Schedule E; $150,000 investment expense on Schedule A
8-18
74. Ariel, Bob, Candice and Dmitri are equal partners in a local ski resort. The resort reports the
following items for the current year:
Each partner receives a Schedule K-1 with one-fourth of the preceding items reported to
A. $100,000 income on Schedule E; $1,000 short-term capital gain on Schedule D

B. $112,500 income on Schedule E; $1,000 short-term capital gain on Schedule D
C. $300,000 income on Schedule E; $26,750 short-term capital gain on Schedule D
D. $1,200,000 income on Schedule E; $107,000 short-term capital gain on Schedule D
75. Owen and Jessica own and operate an S corporation. Each is a 50% owner. The business
reports the following results:
How do Owen and Jessica report these items for tax purposes?
A. $68,500 income on Schedule E; $16,000 investment expense on Schedule D

B. $68,500 income on Schedule E; $8,000 investment expense on Schedule A
C. $137,000 income on Schedule E; $88,000 investment expense on Schedule A
D. $225,000 income on Schedule E; $16,000 investment expense on Schedule A
8-19
76. Which of the following statements is incorrect concerning rental properties?
A. Generally, rental activities are reported on Schedule E.

B. All ordinary expenses related to the rental activity are deductible.
C. Capital improvements may be deducted as expense in the year the improvements are
made.
D. Travel expenses related to the rental activity are calculated using the standard mileage
rate.
77. On June 1st of the current year, Kayla and Ralph purchased a rental beach house for
$700,000. Of that amount, $400,000 was for the land value. How much depreciation deduction
can they take in the current year? (You may need to refer to the depreciation tables.)
A. $0.
B. $5,910.
C. $7,880.
D. $13,790.
78. On June 1st of the current year, Nancy and Dean purchased a rental beach house for
$1,200,000. Of that amount, $800,000 was for the land value. How much depreciation
deduction can Nancy and Dean take in the current year? (You may need to refer to the
depreciation tables.)
A. $7,880.
B. $14,545.
C. $15,760.
D. $23,640.
8-20
79. Jackson owns a condominium in Las Vegas, Nevada, and he rents it to Joanne for $1,500 per
month, payable on the 1st of each month. While he was out of town in August, the
condominium's air conditioning broke and Joann had it replaced for $1,350. How much rental
income does Jackson report for September if Joanne deducts the repair cost from her rent for
September?
A. $0.
B. $150.
C. $1,350.
D. $1,500.
80. Eddie and Camilla received $11,600 for the rental of their rental house in Irvine, California.
Eddie and Camilla do not use this property for personal use. The rent covers six months from
October 1 of the current year to March 31 of next year. The amount also includes a security
deposit of $2,000. How much should Eddie and Camilla report as rental income in the current
tax year?
A. $2,000.
B. $9,600.
C. $11,600.
D. $13,600.
8-21
81. Lori and Donald own a condominium in Colorado Springs, Colorado, that they rent out part of
the time and use during the summer. The rental property is classified as personal/rental
property and their personal use is determined to be 75% (based on the IRS method). They
had the following income and expenses for the year (before any allocation):
How much net loss should Lori and Donald report for their condominium on their tax return
this year?
A. $0.
B. $3,350 loss.
C. $7,400 loss.
D. $9,000 loss.
categorized as:
A. Primarily rental.
B. Primarily personal.
C. Personal/rental.
D. All of these are correct.
83. Julian and Nina own a home in Napa Valley, California, and rented it for 14 days for $10,000
to a large corporation. The rest of the year, they lived in the home. What is the proper tax
treatment of the $10,000 they received?
A. The amount should be reported on Schedule E.

B. The amount should be reported on Schedule C.
C. None of the rental income should be included in gross income.
D. The amount should be reported as other income.
8-22
84. Richard owns a cabin in Utah that he rented for $4,000 for 21 days. He lived there for a total
of 120 days. The expenses for the home included $8,000 in mortgage interest, $1,200 in
property taxes, $1,300 in maintenance and utilities, and $3,500 in depreciation. How much
net income or loss from the Utah home would Richard report for the current year (use the IRS
method)? (Round your answer to the nearest whole number)
A. $0.
B. $1,915 net income.
C. $4,000 net income.
D. $10,000 net loss.
85. Leslie and Devin own a beach cottage that they rented 30 days for $4,500. They used the
cottage for personal use for 45 days during the year. The allocated expenses related to the
cottage total $6,000, resulting in a net loss of $1,500 for this rental activity. What is the
proper tax treatment of these amounts by Leslie and Devin?
A. Report net income of $4,500 on Schedule E.

B. Report net loss of $1,500 on Schedule E.
C. None of the amounts have to be reported.
D. Report income and expenses on Schedule E but expenses cannot exceed income.
categorized as:
A. primarily rental
B. primarily personal
C. personal/rental
D. all of these are correct
8-23
87. Katie and Mike own a home in Newport Beach, California. During the year, they rented the
house for 80 days for $24,000 and used it for personal use for 30 days. The expenses for the
house included $20,000 in mortgage interest, $8,500 in property taxes, $6,000 in utilities,
$2,000 in maintenance, and $12,000 in depreciation. What is the deductible loss for the rental
of their home (without considering the passive loss limitation)? Use the IRS method for
allocation of expenses.
A. $0.
B. $5,000 net income.
C. $17,414 net loss.
D. $27,500 net loss.
88. Lois and Benjamin own a chalet in New Mexico and rented it for 12 days for $6,000. The rest
of the year, the chalet was used by them and their friends and family. What is the proper tax
treatment of the $6,000 income?
A. none of the rental income needs to be reported as part of gross income.

B. the amount should be reported on Schedule E.
C. the amount should be reported on Schedule C.
D. the amount should be reported as other income.
89. Which of the following statements is true concerning vacation home properties?
A. A property rented for 15 days or more and used for personal use for no more than 14 days
is categorized as primarily rental.
B. A property rented for 15 days or more and used for personal use for more than 14 days is
categorized as primarily personal.
C. A property categorized as primarily personal is one rented for zero days.
D. Report all income and expenses for a personal/rental property and the net amount
reported may be either net income or net loss.
8-24
90. Which of the following expense items is(are) deductible as rental expense?
A. Property taxes.
B. Depreciation.
C. Insurance.
D. All are deductible rental expenses.
91. Elizabeth rented her personal residence for 12 days to summer vacationers for $4,800. Rest
of the year, she and her family used the home as their personal residence. She has AGI of
$105,000, excluding the rental income. Related expenses for Elizabeth's personal residence
for the year include the following:
What is Elizabeth's AGI after taking into consideration the rental income and related
expenses for her home?
A. $4,800.
B. $100,200.
C. $105,000.
D. $109,800.
8-25
92. Robert and Melissa own a home in Big Bear Lake, California. During the year, they rented it
for 55 days for $11,000 and used it for 12 days for personal use. The expenses for the house
included $12,000 in mortgage interest, $2,000 in property taxes, $1,000 in utilities, $600 in
maintenance, and $4,000 in depreciation. What is their income or loss from their cabin
(without considering the passive loss limitation)? Use the IRS method for allocation of
expenses. (Round your answer to the nearest whole number)
A. $0.
B. $2,947 net loss.
C. $5,090 net loss.
D. $11,000 net income.
93. Colin and Megan own a cabin in the Mammoth Mountains, California. During the year, they
rented it for 45 days for $10,000 and used it 12 days for personal use. The expenses for the
cabin included $7,000 in mortgage interest, $3,000 in property taxes, $1,200 in utilities, $400
in maintenance, and $3,000 in depreciation. What is their net income or loss from the cabin
(without considering the passive loss limitation)? Use the IRS method for allocation of
expenses. (Round your answer to the nearest whole number)
A. $0.
B. $1,526 net loss.
C. $7,632 net loss.
D. $10,000 net income.
A. patents.
B. plays.
C. songs.
D. all of these.
8-26
95. When royalty income is received, the recipient (tax payer) generally reports the income on
which form?
A. Schedule D.
B. Schedule K-1.
C. 1099-MISC.
D. Schedule E.
96. Darlene is a full-time author and recently published her third romance novel. The royalty
income she receives from the publisher this year should be reported on what schedule?
A. Schedule C.
B. Schedule K-1.
C. 1099-MISC.
D. 1099-INT.
97. Paul is a 45-year-old stockbroker. When he was in his 20s, he was a member of a band called
the Zombies and wrote several hit songs. Paul should report the royalty income he receives in
the current year from his songs on what schedule?
A. Schedule E.
B. Schedule D.
C. Schedule A.
D. Schedule C.
98. Royalties can NOT be earned from which of the following?
A. oil wells.
B. patents.
C. coal mines.
D. stocks.
8-27
A. Building.
B. Equipment.
C. Furniture.
D. Copyrighted material.
100.Jeremiah is a full-time professor of psychology at the University of Washington and an author

of a psychology textbook. The royalty income he receives from the publisher should be
reported on:
A. Schedule C.
B. Schedule K-1.
C. Form 1099-MISC.
D. Schedule E.
101.Which of the following is not considered a flow-through entity?
A. Limited liability company.

B. Sole proprietorship.
C. Partnership.
D. S corporation.
8-28
102.Roger, Ellen, Drew and Cindy are equal partners in a local pub. The pub reports the following
items for the current year:
Each partner receives a Schedule K-1 with one-fourth of the preceding items reported to
A. $192,500 on Schedule E; $40,000 on Schedule A.

B. $257,667 on Schedule E; $40,000 on Schedule A.
C. $385,000 on Schedule E; $40,000 on Schedule A.
D. $770,000 on Schedule E; $160,000 on Schedule A.
103.Which of the following entity(ies) is(are) considered flow-through entity(ies)?
A. C corporation.
B. sole proprietorship.
C. non-profit corporations.
D. estates.
8-29
104.Earl and Sandra own and operate a restaurant as an S corporation. Each is a 50% owner. The
business reports the following results for the year:
How do Earl and Sandra report these items for tax purposes on each of their individual
returns?
A. $41,000 income on Schedule E; $16,000 investment expense on Schedule A.

B. $41,000 income on Schedule E; $32000 investment expense on Schedule A.
C. $82,000 income on Schedule E; $32,000 investment expense on Schedule A.
D. $480,000 income on Schedule E; $16,000 investment expense on Schedule A.
Short Answer Questions
105.When reporting the income and expenses of a rental property, what determines the use of
the Schedule C versus the Schedule E?
8-30
106.What must the owner of rental property do with respect to the rental activity to have it be
considered:
1) material participation?
2) A trade or business?
107.What is meant by ordinary rental expenses and what criteria must be met to be deductible?
Provide some examples of deductible rental expenses. For this question, assume no personal
use of the rental property.
108.What are the criteria that determine an amount as capital improvement rather than repair
and maintenance expense? What is the proper tax treatment of a capital improvement for
rental properties?
8-31
109.Explain the three categories that a rental activity may fall under if used for both personal and
rental purposes. How are the categories determined?
110.What criteria determine a personal and rental use property as personal/rental? How is net
income or loss treated for tax purposes for a personal/rental property?
111.What are the rules concerning the deductibility of travel as it relates to rental properties?
How are travel expenses to and from rental properties calculated?
8-32
112.Kirk and Amy live in Augusta, Georgia. Every year during the Masters Golf Tournament, they
rent their primary personal residence for 10 days for $10,000 to a large corporation that uses
it to entertain clients. The rest of year, they reside full-time in their home. How should Kirk
and Amy treat the rental income? Explain.
113.Explain the difference between the two methods available; the Tax Court's method and the
IRS method, to allocate expenses between personal and rental use of property.
114.Explain what is considered personal use of a rental property.
8-33
115.Meredith has a vacation rental house in the Sierra Mountains. During the year, she and her
immediate family used the house for 12 days for a personal vacation. Meredith spent two
more weekends (4 days in total) repairing the deck. The house was rented for 120 days. How
should the cabin be categorized this year for tax purposes? Explain your answer.
116.Assume the same facts as #71, but Meredith rented her house (at fair value) to her brother
and his family for 9 days (in addition to her personal use) and total days rented was 180
days. How is the cabin categorized now? Explain your answer.
117.Define royalty income. What criteria determine which form is used and where the royalties
are reported?
8-34
118.What are the different types of income that may be reported on Schedule E?
119.What is meant by a passive activity? Why is a rental activity classified as a passive activity?
Can a rental activity be classified as active? Explain.
8-35
Chapter 08 Rental Property, Royalties, and Income from Flow-
Through Entities Answer Key
True / False Questions
1. Rental income is generally reported on Schedule C.
FALSE
Taxpayers report these items on Schedule E of Form 1040.
Accessibility: Keyboard Navigation

Difficulty: 1 Easy
EA: Yes
Learning Objective: 08-01 Explain how income and expenses are recognized and reported for rental property.
Topic: Rental Property Income and Expenses
2. Capital improvements on rental properties may be deducted in the current year.
FALSE
Capital improvements must be capitalized and depreciated over the appropriate asset life.

Difficulty: 1 Easy
EA: Yes
3. A security deposit for a rental property is not reported as income.
TRUE

Difficulty: 1 Easy
EA: Yes
8-36
4. Residential rental properties are depreciated using the straight-line method over 27½
years.
TRUE

Difficulty: 1 Easy
EA: Yes
5. If a tenant pays an expense normally paid by the taxpayer (landlord) in lieu of rent (or the
full rent), that expense is not considered part of rental income to the taxpayer.
FALSE
If a tenant pays an expense normally paid by the taxpayer in lieu of rent, that expense is
included as part of rental income to the taxpayer.

Difficulty: 1 Easy
EA: Yes
6. Rental properties that are also used as vacation homes fall under one of three categories:
(1) primarily rental,

(2) primarily personal, and
(3) personal/rental.
TRUE

Difficulty: 1 Easy
EA: Yes
Learning Objective: 08-02 Understand how to report personal use of a rental property (vacation home).
Topic: Personal Use of Rental Property
8-37
7. If a family member of a taxpayer uses the rental property and pays full rental value, then
those days rented are considered rental days.
FALSE
If any member of the taxpayer's family uses the rental property, the days are considered
personal use days even if the family member pays the full rental value.

Difficulty: 1 Easy
EA: Yes
8. In the case of personal/rental property, a taxpayer can deduct expenses only to the extent
that there is rental income.
TRUE

Difficulty: 1 Easy
EA: Yes
9. Jennifer's beach house rented for 175 days and used by her and her family for 15 days, is
FALSE
Jennifer's house is considered primarily rental use since the personal days were less than
10% of the total rental days.

Difficulty: 1 Easy
EA: Yes
8-38
10. Jonathan and Sandy rented their cabin for 123 days and used the cabin for personal use
for 55 days. The cabin is considered personal/rental property.
TRUE

Difficulty: 1 Easy
EA: Yes
11. There are two methods available to taxpayers to allocate expenses between personal and
rental use of properties.
TRUE
The two methods are the IRS method and the Tax Court method.

Difficulty: 1 Easy
EA: Yes
12. A property rented for less than 15 days and used for personal use the remainder of the
year, should have the rental income reported on Schedule E.
FALSE
This property is considered primarily personal and therefore, none of the rental income is
included in gross income.

Difficulty: 1 Easy
EA: Yes
8-39
13. A personal/rental property (that is not a trade or business) may report its income and
expenses on Schedule A.
FALSE
Rental income and expenses must be reported on a Schedule E.

Difficulty: 1 Easy
EA: Yes
14. A royalty is a payment for the right to use intangible property.
TRUE

Difficulty: 1 Easy
EA: Yes
Learning Objective: 08-03 Know how to report royalty income on Schedule E.
Topic: Royalty Income
15. When royalties are paid, the amount paid is reported to the recipient by the payer at the
end of the year on a Schedule K-1.
FALSE
The payment is reported on Form 1099-MISC.

Difficulty: 1 Easy
EA: Yes
8-40
16. Generally, a taxpayer uses Schedule C to report royalty income.
FALSE
Royalty income is generally reported on a Schedule E.

Difficulty: 1 Easy
EA: Yes
17. Royalties resulting from a non-trade or non-business activity should be reported on a

Schedule E.
TRUE

Difficulty: 1 Easy
EA: Yes
18. Entities such as partnerships, LLC's, and S Corporations are known as flow-through
entities.
TRUE

Difficulty: 1 Easy
EA: No
Learning Objective: 08-04 Discuss the different types of flow-through entities reported on Schedule E; such as
partnerships; S corporations; LLCs; trusts; and estates.
Topic: Flow-Through Entities
8-41
19. Flow-through entities are named as such because they are taxed continuously.
FALSE
The entities are known as flow-through entities because they are not taxed directly.

Difficulty: 1 Easy
EA: No
20. Flow-through entities supply each owner at the end of the year with a Schedule E,
indicating his/her income and expenses to report.
FALSE
Each owner is supplied a K-1 indicating the owner's share of income, expenses, or losses.

Difficulty: 1 Easy
EA: No
21. Flow-through entities file "informational returns."
TRUE

Difficulty: 1 Easy
EA: No
8-42
22. The income from a partnership to its partner is considered self-employment income.
TRUE

Difficulty: 1 Easy
EA: No
23. Rental activities by definition are passive activities.
TRUE

Difficulty: 1 Easy
EA: No
24. If a taxpayer materially participates in his/her rental activity as a real estate professional,
the activity is considered a trade or business and not a passive activity.
TRUE

Difficulty: 1 Easy
EA: No
25. A taxpayer with a rental activity may be allowed up to $25,000 of rental losses against
other (active or portfolio) income.
TRUE

Difficulty: 1 Easy
EA: No
8-43
26. Rental income may be reported on a Schedule A or a Schedule C.
FALSE

Difficulty: 1 Easy
EA: Yes
27. All rental properties are depreciated using the straight-line method over 39 years.
FALSE

Difficulty: 1 Easy
EA: Yes
28. If a tenant provides service for the rental property in lieu of rental payment, the fair market
value of the service is considered rental income and must be reported as income.
TRUE

Difficulty: 1 Easy
EA: Yes
29. All advance rental payments received, including security deposits for a rental property,
must be reported as income when received.
FALSE

Difficulty: 1 Easy
EA: Yes
8-44
30. Alexis' cabin in the mountains that was rented for 125 days and used by her for 12 days is
FALSE

Difficulty: 1 Easy
EA: No
Topic: Vacation Home
31. Joey and Susan rented their house for 2 weeks and used it for personal use for the
remainder of the year. The house is considered personal/rental property.
FALSE

Difficulty: 1 Easy
EA: No
32. Rental properties that are also used as vacation homes fall under one of two categories:
(1) primarily rental; or

(2) primarily personal.
FALSE

Difficulty: 1 Easy
EA: No
33. In the case of a primarily personal property, a taxpayer may report a net loss as long as
the correct allocation method was used.
FALSE

Difficulty: 1 Easy
EA: No
8-45
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Transcriber’s Notes
Punctuation, hyphenation, and spelling were made
consistent when a predominant preference was found in the
original book; otherwise they were not changed.
Simple typographical errors were corrected; unbalanced
quotation marks were remedied when the change was
obvious, and otherwise left unbalanced.
The index was not checked for proper alphabetization or
correct page references.
Page 19: The inconsistent indentation of the ninth line of
the poem, “Now Winter Nights Enlarge” was printed that way.
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Fundamentals of Taxation 2015 8Th Edition Cruz Test Bank Full Chapter PDF

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Fundamentals of Taxation 2015 8th

Edition Cruz Test Bank

Rental Property, Royalties, and Income from Flow-Through Entities

True / False Questions

1. Rental income is generally reported on Schedule C.

2. Capital improvements on rental properties may be deducted in the current year.

3. A security deposit for a rental property is not reported as income.

(1) primarily rental,

14. A royalty is a payment for the right to use intangible property.

16. Generally, a taxpayer uses Schedule C to report royalty income.

17. Royalties resulting from a non-trade or non-business activity should be reported on a

21. Flow-through entities file "informational returns."

23. Rental activities by definition are passive activities.

26. Rental income may be reported on a Schedule A or a Schedule C.

(1) primarily rental; or

36. A taxpayer may use a Schedule C or a Schedule E to report royalty income.

Multiple Choice Questions

A. IRC section 179 may be claimed.

A. Travel related to the property

A. $3,200 net loss

A. Should be reported on Schedule E

A. Report net income of $4,500

A. It must be reported on Schedule C only

71. Which of the following entity(ies) is(are) considered flow-through?

A. $100,000 income on Schedule E; $50,000 investment expense on Schedule A

A. $100,000 income on Schedule E; $1,000 short-term capital gain on Schedule D

A. $68,500 income on Schedule E; $16,000 investment expense on Schedule D

A. Generally, rental activities are reported on Schedule E.

A. The amount should be reported on Schedule E.

A. Report net income of $4,500 on Schedule E.

A. none of the rental income needs to be reported as part of gross income.

98. Royalties can NOT be earned from which of the following?

100.Jeremiah is a full-time professor of psychology at the University of Washington and an author

101.Which of the following is not considered a flow-through entity?

A. Limited liability company.

A. $192,500 on Schedule E; $40,000 on Schedule A.

103.Which of the following entity(ies) is(are) considered flow-through entity(ies)?

A. $41,000 income on Schedule E; $16,000 investment expense on Schedule A.

Short Answer Questions

114.Explain what is considered personal use of a rental property.

True / False Questions

1. Rental income is generally reported on Schedule C.

Taxpayers report these items on Schedule E of Form 1040.

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2. Capital improvements on rental properties may be deducted in the current year.

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3. A security deposit for a rental property is not reported as income.

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(1) primarily rental,

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Rental income and expenses must be reported on a Schedule E.

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14. A royalty is a payment for the right to use intangible property.

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The payment is reported on Form 1099-MISC.