Name ______________________________
RE 618/890 – Real Estate Investment Analysis
Fall 2001
Midterm Exam #2 – Solutions
Dr. Stanley D. Longhofer
T-Th 8:00-9:15
You have 1 hour and 15 minutes to complete this exam. I know its long; don’t worry, just do the
best you can in the time allotted. I would spend a few minutes looking it over before you begin;
start with the questions you know best and work on the others last. The number of points for
each question is intended to indicate how much time you should spend on each. This weighting
incorporates both the time it should take you to answer the question and its relative importance.
I’ve tried to eliminate any ambiguity about how to interpret the questions on the exam.
Nevertheless, if you make any assumptions not explicitly stated in the questions, make sure you
write them down so I can see what you are doing.
1) (5 points) Tex is a petroleum engineer in Fort Worth, but he and his wife own two rental
properties that they operate on the side. This year Tex earned $65,000 in salary and bonuses,
and his wife earned $30,000. They also took several short positions in the stock market, and
earned $35,000 in short term gains from these investments. One of their rental properties
generated positive taxable income of $10,000, while the other lost $15,000. In addition, Tex
and his wife have $10,000 of suspended losses that have carried forward from prior years.
Assume that Tex and his wife file a joint tax return.
a) What is the total taxable income Tex and his wife will report on their return for this year?
Active income $95,000
+ Portfolio income 35,000
Adjusted gross income $130,000
Passive losses $5,000
+ Suspended losses 10,000
Total passive losses $15,000
Because Tex and his wife’s active and portfolio income exceeds $100,000, their rental
real estate loss allowance is reduced by ($130,000 $100,000) 0.50 = $15,000.
Thus, they can claim $25,000 $15,000 = $10,000 of their passive losses against
active and portfolio income.
Their total taxable income for the year is therefore $130,000 $10,000 = $120,000.
b) What happens to the passive losses they are unable to use this year?
Their unused passive losses of $5,000 are carried forward to next year. If they cannot be
used then, they will continue to be carried forward until they can be used or until the
property is sold.
