Real Estate License Exam Prep · Units 1–10 · Quick reference
Real Estate LicenseNational Portion
Adult · Career8 pages
Property, estates and encumbrances, land description, contracts, agency, listings, financing, appraisal, title and closing, leases, fair housing, disclosures, environmental issues and real estate math, with original practice problems. Not affiliated with any testing company or state commission. State law portions vary: check with your state’s real estate commission.
1The exam2Real property3Metes & bounds4Rectangular survey5Estates6Ownership7Encumbrances8Government & taxes9Environmental10Appraisal11Deeds & title12Mortgages & loans13Loan math & law14Closing15Contracts16Agency & disclosure17Listings18Fair housing19Leases & management20Real estate math21Investment & tax22Practice
1The License Examnational and state portions
Two parts
Each state licenses its own agents. The exam has a national portion shared by most states (commonly 80 scored questions; this guide) and a state portion on that state’s license law. Each state sets the passing score (commonly 70%).
Read the qualifier (EXCEPT, NOT) and answer everything; the course notes no guessing penalty.
Check your state
- State law portions vary: license titles, agency types, forms, fees and deadlines differ.
- Check with your state’s real estate commission and its current candidate handbook.
About this guide
Not affiliated with or endorsed by any testing company, state real estate commission or trade association. No exam vendor’s items are used or imitated; every practice problem is original.
Edition: October 2026. General information, not legal or tax advice; laws and figures change.
2Real Propertyland, fixtures and rights
Three layers
Land: the surface, down to the earth’s center and up into the air, with natural attachments.
Real estate: land + permanent improvements.
Real property: real estate + the bundle of rights (possession, control, enjoyment, exclusion, disposition).
Personal property (chattels) is movable and passes by bill of sale.
Fixture tests (Traditional)
MARIA: Method of attachment, Adaptation, Relationship of the parties, Intention, Agreement.
Fixtures and crops
- A fixture passes with the deed.
- Trade fixtures stay the tenant’s if removed before the lease ends; then the landlord’s by accession.
- Emblements (annual crops) are personal; trees are real until severed.
- A written agreement overrides the tests; intention is the key legal test.
| Physical | Economic |
|---|---|
| immobility | scarcity |
| indestructibility | improvements (modification) |
| uniqueness (nonhomogeneity) | permanence of investment (fixity) |
| area preference (situs) |
Land does not depreciate; buildings do.
3Metes and Bounds; Lot and Blockwalking the boundary
Metes and bounds
- Starts at a point of beginning (POB) and runs by courses (bearings) and distances.
- A bearing starts with N or S, then turns 0° to 90° toward E or W.
- Monuments (pins, trees, rivers) control over courses; courses over distances.
- It must return to the POB to close.
Area of the parcel Worked
300 ft × 200 ft = 60,000 sq fta rectangle
60,000 ÷ 43,560 = 1.38 acressq ft → acres
| Unit | Equals |
|---|---|
| 1 chain | 66 ft = 4 rods = 100 links |
| 1 rod | 16.5 ft |
| 1 mile | 5,280 ft = 80 chains = 320 rods |
| 1 acre | 43,560 sq ft = 160 sq rods = 10 sq chains |
Lot and block
A lot on a recorded plat: “Lot 7, Block 3, Maple Ridge Addition, Plat Book 12, page 40.” A street address is not a legal description.
The course pairs boundary lines with “Thou shalt not remove thy neighbour’s landmark, which they of old time have set in thine inheritance” (Deuteronomy 19:14, KJV).
4Rectangular Surveytownships and sections
The grid
- Principal meridian: north–south line. Base line: east–west.
- Range: a column of townships, E or W. Tier: a row, N or S.
- Township: 6 miles on a side (“6 miles square”): 36 sq mi, or 36 sections.
- Section: 1 sq mi = 640 acres.
- Correction lines every 24 miles; odd pieces are government lots.
Aliquot acres Worked
S½ of the NE¼ of Section 14: 640 × ½ × ¼ = 80 acresmultiply
SE¼ of the SE¼ of the SE¼: 640 × ¼ × ¼ × ¼ = 10 acres = 435,600 sq ft
NW¼ and the N½ of the NE¼: 160 + 80 = 240 acres“and” = add
Snake through the township
Section 1 sits in the northeast corner; the numbers snake back and forth to 36 in the southeast.
Compute forward, find backward
Multiply every fraction to get acres; read backward from the section to find the parcel.
5Estates and Interestsownership and rights
| Freehold estate | Key words and facts |
|---|---|
| Fee simple absolute | the most complete estate; unlimited, transferable, inheritable |
| Fee simple determinable | “so long as,” “while”: ends automatically if broken |
| Fee simple, condition subsequent | “but if,” “provided that”: grantor must act to retake |
| Life estate | lasts for a life; tenant may sell only the life estate and must not commit waste |
| Pur autre vie | measured by another person’s life |
| Remainder / reversion | future interest of a third party / of the grantor or heirs |
| Leasehold | Ends |
|---|---|
| Estate for years | on a fixed date, no notice (any length) |
| Periodic | renews until notice |
| At will | notice or either party’s death |
| At sufferance | holdover without consent |
Lease facts
- A sale does not end a lease; the buyer takes subject to it.
- The landlord holds the leased fee and the reversion.
Water, air and minerals
- Riparian: beside a river. Littoral: beside a lake or sea. Prior appropriation (most western states): first beneficial use.
- Accretion gains land (alluvion); avulsion is sudden loss, and the boundary generally stays.
- Air and mineral rights can be sold or leased apart from the surface.
6Forms of Ownershipone owner or many
| Form | Shares | Survivorship? | Notes |
|---|---|---|---|
| Severalty | one owner | n/a | one person or entity alone |
| Tenancy in common | may be unequal | no | each may sell, mortgage or will a share |
| Joint tenancy | equal | yes | four unities; a buyer from one joint tenant becomes a tenant in common |
| Tenancy by the entirety | equal (spouses) | yes | married couples where allowed; neither alone may convey |
| Community property | equal (spouses) | by state law | acquired during marriage; gifts, inheritances and prior property stay separate |
Joint tenancy unities (Traditional)
PITT: Possession, Interest, Time, Title.
Shared buildings
- Condominium: unit in fee + a share of common elements.
- Cooperative: residents hold stock and a proprietary lease.
- PUD: lots in fee; the association owns common areas. Timeshare: an estate or a use.
Owning through an entity
- Trust: a trustee holds title for a beneficiary.
- LLC: members are shielded from its debts.
- REIT: owns or finances income property; pays out most taxable income.
7Encumbrances and Easementsclaims that ride along
| Lien | Specific / general | Voluntary? |
|---|---|---|
| Mortgage | specific | voluntary |
| Property tax, special assessment | specific | involuntary |
| Mechanic’s lien | specific | involuntary |
| Judgment | general | involuntary |
| Federal income tax lien | general | involuntary |
Priority: property taxes and special assessments first, whatever the date; then, generally, the order of recording.
Easements
- Appurtenant
- benefits the dominant parcel, burdens the servient; runs with the land
- In gross
- benefits a person or utility; no dominant tenement
- By necessity
- access for a landlocked parcel
- By prescription
- open, notorious, continuous, hostile, uninterrupted for the state’s period
Not easements
- License: personal, revocable permission; ends at death or sale.
- Encroachment: a fence or building over the line; found by a survey.
- Lis pendens: recorded notice of a pending lawsuit.
Private restrictions
- Deed restrictions and CC&Rs bind later owners and are enforced by the association or neighbors, usually by injunction.
- If a private rule and zoning conflict, the stricter one generally governs.
8Government Controls and Taxespublic limits on land
Four government powers (Traditional)
PETE: Police power, Eminent domain, Taxation, Escheat.
Zoning tools
- Variance
- relief from a dimensional rule for a hardship unique to the land
- Conditional use
- a use the zone allows with approval (a school, a church)
- Nonconforming use
- lawful before the change; may continue, usually not expand
- Spot zoning
- one parcel rezoned against the plan; generally illegal
What each does
- Police power: zoning and codes; ordinarily no payment.
- Eminent domain: public use, just compensation (market value), by condemnation.
- Escheat: to the state with no will and no heirs.
Planning tools
- A master plan guides zoning; setbacks, buffer zones and density limits shape each lot.
- Building codes set construction standards; a certificate of occupancy confirms them.
- Subdivision rules govern plats, streets and utilities.
Property tax Worked
Market $400,000 × 80% ratio = $320,000 assessed
$320,000 − $50,000 exemption = $270,000
25 mills = 0.025: $270,000 × 0.025 = $6,750mills ÷ 1,000
Special assessment: 120 front ft × ($90,000 ÷ 1,200 ft) = $9,000only owners who benefit pay
Unpaid taxes: lien first in line, then a tax sale; the owner may redeem as state law allows
9Environmental Issueshazards and federal rules
Lead-based paint (federal)
- Housing built before 1978: sellers and landlords disclose known lead paint and hazards and give the EPA pamphlet.
- Buyers get a 10-day chance to test (the parties may agree otherwise); tenants do not.
Flood zones
A special flood hazard area has a 1% or greater chance of flooding each year (zones starting with A or V); federally regulated or insured lenders require flood insurance there.
Hazards
- Radon
- colorless, odorless gas from uranium decay; EPA: fix the home at 4 pCi/L or more
- Asbestos
- dangerous when friable; encapsulate or remove
- UST
- tank with at least 10% of its volume underground; leaks foul soil and water
- Wetlands
- filling usually needs a Section 404 permit
CERCLA (Superfund, 1980)
- Liability is strict, joint and several, and retroactive; a current owner can pay for others’ waste.
- Innocent landowner defense (1986) requires all appropriate inquiry before buying.
- Phase I = records, site visit, interviews; Phase II samples soil and water.
10Appraisalthree approaches to value
Value basics
- Value is worth; price was paid; cost built it. Market value: the most probable price in a fair, open sale.
- Measure honestly: “A false balance is abomination to the LORD: but a just weight is his delight” (Proverbs 11:1, KJV).
Four elements of value (Traditional)
DUST: Demand, Utility, Scarcity, Transferability.
Cost approach Worked
Building: 2,000 sq ft × $150 = $300,000 newreplacement or reproduction
Depreciation: 10 ÷ 50 × 300,000 = $60,000effective age ÷ economic life
Land $90,000 + $240,000 = $330,000land never depreciates
Principles
- Highest and best use: legal, possible, feasible, most productive.
- Conformity: value peaks near similar homes.
- Contribution: worth what it adds, not its cost.
- Progression / regression: the lesser home gains / the better one loses.
Also know
- GRM = price ÷ monthly rent: 270,000 ÷ 1,800 = 150.
- Depreciation: physical, functional, external (always incurable).
- Reconciliation weighs, never averages. A higher cap rate means a lower value.
- FIRREA (1989): licensed or certified appraisers; USPAP standards. A CMA or BPO is not an appraisal.
Sales comparison Worked
Comp sold $410,000; it has a $15,000 garage the subject lacks; the subject has a $10,000 bath the comp lacks
410,000 − 15,000 + 10,000 = $405,000adjust the comp
Adjust the comp (Traditional)
CBS: Comp Better, Subtract (comp poorer, add).
Income approach Worked
10 units × $1,200 × 12 = $144,000 potential gross
− 5% vacancy ($7,200) + $3,600 other = $140,400 effective gross
− $56,400 expenses = $84,000 NOI (no debt service)
Value = 84,000 ÷ 0.07 = $1,200,000V = I ÷ R
11Deeds and Transfer of Titlehow ownership moves
| Deed | Protection | Deed | Protection |
|---|---|---|---|
| General warranty | most: five covenants (seisin, quiet enjoyment, against encumbrances, further assurance, warranty forever) | Bargain and sale | implies title; no express warranties |
| Special warranty | only defects during the grantor’s ownership | Quitclaim | none; whatever interest exists; clears clouds |
A valid deed needs
- A competent grantor (the grantee need only be identifiable).
- Words of conveyance (granting clause) and a legal description.
- The grantor’s signature.
- Delivery and acceptance in the grantor’s lifetime: title passes then.
- Acknowledgment is needed to record, not to be valid.
Involuntary and by will
- Adverse possession: actual, open and notorious, continuous, hostile, exclusive, for the state’s period.
- Testate: a devise is real property; a bequest, personal.
- Intestate: state descent law; no heirs → escheat.
- Also: foreclosure, eminent domain, partition.
Recording and title
- Recording gives constructive notice; so does possession.
- Recording acts: race, notice, race-notice.
- Chain of title + abstract or title search; quiet title suit removes a cloud.
- Title insurance: one premium; covers past defects. The lender’s policy protects only the lender.
- Torrens: a court-issued certificate of title.
12Mortgages and Loan Typesthe debt, security and programs
| Instrument | Parties | What it does |
|---|---|---|
| Promissory note | maker (borrower), payee (lender) | the promise to pay; personal liability |
| Mortgage | mortgagor (borrower), mortgagee (lender) | two-party lien on the property |
| Deed of trust | trustor, trustee, beneficiary (lender) | trustee holds bare legal title until paid |
Hypothecation: pledging property without giving up possession. Lien-theory states: the borrower keeps title; title-theory states: the lender or trustee holds it.
| Loan | Backing | Notes |
|---|---|---|
| Conventional | none (lender, private insurer) | conforming meets Fannie/Freddie rules; jumbo exceeds the limit |
| FHA | insured by FHA (HUD) | small down payment; MIP up front and yearly |
| VA | part guaranteed by VA | eligible veterans (COE); funding fee; may need no down payment |
| USDA | guaranteed by USDA | eligible rural areas; often no down payment |
The government insures or guarantees; private lenders lend. PMI: commonly over 80% LTV; cancel on request at 80% of original value, automatic at 78% (Homeowners Protection Act of 1998).
Key clauses
- Acceleration: all due on default. Alienation: due on sale. Defeasance: lien released when paid.
- A buyer who assumes the loan is personally liable; one taking subject to it is not.
Special loans
- HELOC: a credit line secured by the home. Wraparound: a junior loan around an existing one.
- Purchase-money: often seller carry-back. Blanket: several parcels. Package: adds personal property.
Default and foreclosure
- Judicial: lawsuit, court-ordered sale. Nonjudicial: power of sale, trustee’s sale.
- Redemption: equitable before the sale; statutory after, only where allowed.
- Deficiency judgment where state law allows. Deed in lieu: lender takes junior liens with it. Short sale: less than owed, lender approves.
Secondary market
- Fannie Mae (1938) and Freddie Mac (1970) buy conforming loans and pool them into securities.
- Ginnie Mae (1968) guarantees securities of FHA, VA and USDA loans; it buys none.
Payment patterns
- ARM: rate = index + margin, with initial, periodic and lifetime caps.
- Balloon: a large last payment. GPM: may cause negative amortization.
- Reverse (HECM): owner 62 or older; repaid at death, sale or move.
13Loan Math and Lending Lawpayments, ratios, disclosures
A $315,000 loan Worked
Price $360,000, appraisal $350,000: LTV = 315,000 ÷ 350,000 = 90%; down payment $45,000use the lesser value
2 points = 315,000 × 0.02 = $6,3001 point = 1% of the loan
Month 1 interest at 6.5%: 315,000 × 0.065 ÷ 12 = $1,706.25
P&I (30 years) $1,991.01; principal $284.76; new balance $314,715.24payment − interest
PITI: 1,991.01 + 4,800 ÷ 12 + 1,440 ÷ 12 = $2,511.01; on $9,000 a month that is 27.9%28% and 36% are examples, not law
Truth in Lending (1968), Regulation Z
- Disclose the APR and finance charge.
- An ad trigger term (down payment, payment count or amount, finance charge) requires full disclosure; the APR alone does not.
- Rescission: some refinances of a principal dwelling (never a purchase loan) until midnight of the third business day.
RESPA (1974) and TRID (2015)
- Section 8: no kickbacks or fees for referrals (broker-to-broker fees are allowed).
- Loan Estimate: by the third business day after application.
- Closing Disclosure: received at least three business days before closing.
Equal Credit Opportunity Act (1974)
- Bars credit discrimination; its bases include marital status, age and public-assistance income, which the Fair Housing Act does not list.
14Closing and Prorationsdebits, credits, days
| Item | Buyer | Seller |
|---|---|---|
| Purchase price | debit | credit |
| Earnest money, new loan | credit | n/a |
| Seller’s loan payoff, commission | n/a | debit |
| Taxes unpaid (in arrears) | credit | debit |
| Taxes prepaid by the seller | debit | credit |
| Rent collected in advance, security deposits | credit | debit |
Net to seller = seller credits − seller debits. Cash to close = buyer debits − buyer credits.
Proration (taxes in arrears) Worked
$4,380 a year, closing June 30; seller pays through the day of closing
365-day year: 4,380 ÷ 365 = $12 a day; Jan. 1 to June 30 = 181 days
12 × 181 = $2,172: debit seller, credit buyer
360-day year (30-day months): 4,380 ÷ 360 × 180 = $2,190read which year the problem uses
Closing facts
- An escrow (closing) agent is neutral and follows written instructions.
- Transfer tax example: $1 per $500 on $350,000 = $700; rates and who pays vary by place.
- The settlement agent reports the seller’s proceeds to the IRS on Form 1099-S.
- Closing Disclosure timing: §13.
15Contractsvalid, void, voidable
Elements of a valid contract
- Competent parties (of age, sound mind).
- Offer and acceptance on the same terms (mutual assent).
- Consideration: something of legal value.
- Lawful object.
- For real estate, in writing and signed (Statute of Frauds, from England’s 1677 act).
Contract types
- Bilateral: promise for promise (purchase agreement). Unilateral: one side bound (option, open listing).
- Executory: not yet performed. Executed: fully performed.
| Status | Meaning |
|---|---|
| Valid | all elements; binding and enforceable |
| Void | no effect from the start (unlawful object) |
| Voidable | one protected party may cancel (a minor; fraud) |
| Unenforceable | valid but a court will not enforce (oral sale of land) |
Special contracts
- Option: the optionor is bound; the optionee may buy.
- Right of first refusal: match a real offer.
- Installment (land) contract: the vendor keeps legal title until paid; the vendee holds equitable title.
Offer and acceptance
- A counteroffer kills the original offer.
- An offer may be revoked before acceptance is communicated unless paid to stay open.
- A signed purchase agreement gives the buyer equitable title; a seller’s death does not cancel it.
- Earnest money, recording and notarizing are not contract elements.
Remedies and changes
- Specific performance: the court orders the sale; land is unique.
- Liquidated damages: an agreed sum, often the earnest money.
- Rescission: undo, both restored. In an assignment the assignor stays liable; a novation releases.
16Agency and Disclosureduties owed, facts disclosed
The parties
- Principal (client): owed fiduciary duties.
- Agent: the brokerage, through its licensees.
- Customer: owed honesty, fair dealing and disclosure of known material defects.
Fiduciary duties (Traditional)
OLD CAR: Obedience (lawful orders), Loyalty, Disclosure, Confidentiality, Accounting, Reasonable care and skill.
Other relationships
- Dual agency: both sides, only with informed written consent where allowed.
- Designated: one licensee per side. Transaction broker: represents neither.
Kinds of agent
- Universal: all that can be delegated. General: a property manager. Special: one task, such as a listing.
Creating and ending agency
- Created by express agreement, implied conduct, ratification or estoppel.
- Who pays does not decide who is the client.
- Ends by completion, expiration, agreement, or death or incapacity of either.
Truth in selling
- Puffing (“gorgeous view”) is opinion, generally not actionable.
- Misrepresentation: a false fact; fraud is intentional.
- Confidentiality never hides a known material defect.
Disclosure terms
- Material fact: one a reasonable person would weigh in the deal.
- Latent defect: hidden; disclose if known. Patent: visible on inspection.
- Stigmatized property (death, crime): rules vary by state.
- “As is” never excuses hiding a known latent defect.
Who discloses what
- Seller: the state’s condition form (where required) and lead paint (§9).
- Licensee: known material defects to every party; agency status early.
- Licensees dealing for themselves disclose their license; ads name the firm (no blind ads).
17Listing and Buyer Agreementswho gets paid, when
| Listing | Broker paid when | Owner sells alone? |
|---|---|---|
| Exclusive right to sell | anyone sells during the term | still owes |
| Exclusive agency | anyone but the owner sells | owes nothing |
| Open | that broker is the procuring cause | owes nothing |
| Net | keeps all above the seller’s net | illegal or discouraged in many states |
Listing facts
- A listing is an employment contract with the brokerage; the firm owns it and all pay flows through the broker.
- A protection clause pays the broker if a buyer it introduced buys soon after expiration.
Buyer agreements
- Exclusive buyer agency
- paid on any purchase in the term
- Exclusive-agency buyer
- buyer owes nothing if he finds it alone
- Open buyer agency
- pay only the broker who found it
Antitrust (Sherman Act, 1890)
- Price fixing: commissions are always negotiable.
- Group boycott: refusing together to deal with a firm.
- Market allocation: dividing areas or customers.
- Tie-in: “buy this lot only if you list with us.”
18Fair Housing Lawwhat the statutes say
| Law | Protected classes | Notes |
|---|---|---|
| Civil Rights Act of 1866 | race | all citizens have the same right “to inherit, purchase, lease, sell, hold, and convey real and personal property”; no exemptions; reaches private sales (Jones v. Alfred H. Mayer Co., 1968) |
| Fair Housing Act (Title VIII, 1968) | race, color, religion, national origin (1968); sex (1974); handicap, familial status (1988) | seven classes; sale, rental, lending, brokerage and ads of dwellings; HUD complaints within one year |
| ADA (1990) | disability | offices open to the public; dwellings fall under the Fair Housing Act |
State and local laws may add classes; check your state.
Prohibited acts
- Steering: channeling buyers toward or away from areas by protected class, even “helpfully.”
- Blockbusting: urging owners to sell by citing the entry of a protected class.
- Redlining: refusing or worsening loans or insurance in an area because of who lives there.
- No discriminatory ads, even by exempt owners.
Exemptions (lost if a broker or a biased ad is used)
- Owner’s own single-family house, no broker, owning at most three.
- Owner-occupied building of four or fewer units.
- Religious groups and private clubs, within limits.
- Older persons: all 62 or older, or 80% of units with someone 55 or older.
Key terms
- Familial status: children under 18 with a parent or custodian, including pregnancy.
- Reasonable modification: a ramp or grab bar; resident pays.
- Reasonable accommodation: a rule change, such as an assistance animal.
- Design rules: four or more units, first occupied after March 13, 1991.
19Leases and Property Managementlandlord, tenant, manager
Lease types
- Gross: fixed rent; landlord pays taxes, insurance, upkeep.
- Net: tenant also pays taxes (single), + insurance (double), + maintenance (triple).
- Percentage: base + a percent of sales over a breakpoint.
- Graduated / index: set step-ups / tied to an index.
- Ground lease: land only. Sale-leaseback: sell, then rent back.
Percentage lease Worked
$3,000 a month + 5% of annual sales over $400,000; sales $520,000
36,000 + 0.05 × 120,000 = $42,000 a yearpercent only above the breakpoint
Property management
- The manager is usually a general agent under a written management agreement.
- Fee on rents collected: 8% of $96,000 = $7,680.
- Maintenance: preventive (before), corrective (after), construction (changes or additions).
Tenant rights
- Quiet enjoyment of possession; habitability in most states.
- Assignment: the whole lease. Sublease: the subtenant pays the tenant, who stays liable.
- Constructive eviction: the tenant must move out within a reasonable time.
- Evict only through the courts.
Four risk choices (Traditional)
ACTS: avoid, control, transfer (buy insurance) or retain (a deductible).
20Real Estate Mathworked examples
Part = Whole × Rate
Part = Whole × Rate
Percents Worked
Bought $250,000, sold $300,000: 50,000 ÷ 250,000 = 20% gaindivide by the old value
Sold for $276,000 at a 15% profit: cost = 276,000 ÷ 1.15 = $240,000
NOI $84,000 on a $1,050,000 price: cap rate = 8%R = I ÷ V
Cover the unknown (Traditional)
T-bar: Part on top; Whole × Rate below. Cover what you want: Part = W × R; Whole = P ÷ R; Rate = P ÷ W.
Commission split Worked
$425,000 × 6% = $25,500total
Listing firm’s 50% = $12,750
Agent’s 70% of the firm share = $8,925from the firm share
Price for a target net Worked
Seller wants $380,000 net, has $6,000 in costs, pays 6%
(380,000 + 6,000) ÷ (1 − 0.06) = $410,638.30divide; don’t add 6%
Area and volume Worked
Lot 125 ft (front) × 210 ft = 26,250 sq ft; 26,250 ÷ 43,560 = 0.60 acre
Triangle: ½ × 150 × 80 = 6,000 sq ft
Slab 60 ft × 12 ft × 4 in: 60 × 12 × 4⁄12 = 240 cu ft; 240 ÷ 27 = 8.89 cu ydinches → feet
21Investment and Tax Basicsdepreciation, gain, exchanges
Cost recovery Worked
Building $330,000 (never the land) ÷ 27.5 years = $12,000 a yearresidential rental
Nonresidential property: 39 yearsno depreciation on your own home
Section 121 (main home)
- Owned and used as the principal residence 2 of the 5 years before the sale.
- Exclude up to $250,000 of gain ($500,000 for married couples filing jointly).
Gain on a home sale Worked
Basis $250,000 + $30,000 improvements = $280,000 adjusted basis
$420,000 price − $25,000 selling costs = $395,000 amount realized
Gain = $115,000; under the $250,000 exclusion, so taxable gain $0Section 121
Cash flow
Cash flow = NOI − debt service. Explain concepts, but send tax questions to a CPA or tax attorney.
Section 1031 exchange
- Trade investment or business real property for like-kind real property.
- Identify within 45 days; finish within 180 days.
- Tax is deferred, not erased; boot is taxable now.
22Practice Problemsoriginal, with answers
| Problem | Answer | Problem | Answer |
|---|---|---|---|
| A bakery tenant bolts display shelves to the wall. Whose are they when the lease ends? | The tenant’s (trade fixtures) if removed before the lease ends; after that, the landlord’s. | What do 2 points cost on a $250,000 loan? | 250,000 × 0.02 = $5,000 |
| How many acres are in the N½ of the SW¼ of a section? | 640 × ½ × ¼ = 80 acres | A 90 ft × 140 ft lot sells for $3.50 a square foot. The price? | 12,600 sq ft × 3.50 = $44,100 |
| Price $480,000, appraisal $475,000, loan $384,000. What is the LTV? | 384,000 ÷ 475,000 = 80.8% (use the lesser value) | $390,000 sale, 5.5% commission split 50/50 between firms; the agent keeps 60% of her firm’s share. Her pay? | 21,450 × 0.5 × 0.6 = $6,435 |
| During an exclusive-agency listing, the owner finds a buyer herself. Is a commission owed? | No. Only an exclusive-right-to-sell listing pays then. | A house built in 1975 is sold. What does federal lead law require? | Disclose known lead paint, give the EPA pamphlet and offer a 10-day test period |
| Taxes of $3,650 are paid in arrears. Closing is day 73 of a 365-day year; the seller pays that day. The entry? | 3,650 ÷ 365 × 73 = $730: debit seller, credit buyer | Which co-ownership needs the four unities and carries survivorship? | Joint tenancy |
| NOI is $66,000 and the cap rate is 7.5%. Estimate the value. | 66,000 ÷ 0.075 = $880,000 | What is one month’s interest on a $200,000 balance at 6%? | 200,000 × 0.06 ÷ 12 = $1,000 |
| A seller’s agent tells a buyer, “My seller will take less.” Which duty is broken? | Confidentiality (and loyalty) owed to the seller | Under a deed of trust, who holds legal title until the loan is paid? | The trustee (bare legal title, for the lender) |
| A duplex owner living in one unit lists the other with a broker and refuses families with children. Exempt? | No. Using a broker ends the exemption. | Which deed carries no warranties at all? | The quitclaim deed |
All problems are original to School Launch; none comes from any exam vendor.