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	5.  Almost every chapter or course has extensive exercises involving short-answer questions and quizzes. 
		Which of the following is NOT a purpose of these exercises?
	a. Focus on important concepts and translate them from "legalese" into plain English
	b. Focus on important concepts to pass the final and license exams
	c. Provide proof to the R/E Commission that you have spent at least 168 hours on the courses (correct answer)
	d. Present new information or a different 'angle' than the text information

	Quizzes and Short-Answer Sections supplement information covered in the text

	Following the text of each chapter, are short-answer (fill-in-the-blank) questions and a quiz on the material found in that chapter.  
	The purpose of these exercises is to simplify and focus on the important information required by the Colorado Real Estate Commission 
	and tested on the state examination.)  The student should complete the short-answer sections and take each chapter quiz to assist in 
	learning these important topics, and for self-evaluation purposes.     
	...
	The chapter short-answer questions and quizzes are meant to be instructional and self-evaluation tools, to inform the student as to 
	not only what the Real Estate Commission expects the student to be proficient, but also what might be tested on the state exam.  As such, 
	the short answer and quiz questions are not always 'mirror images' of the text, and occasionally present new information, or a different  
	“angle” than the preceding information.

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The right of post-foreclosure redemption was eliminated by law, with regards to defaulting borrowers on a Deed of Trust. The Installment land contract is not a "sale with financing secured by a deed of trust", but is more like a “lease”, where the tenant gets to buy the property (and have their payments attributed to the purchase) at the end of a lease. I believe that the installment land contract – although it is describes as being “a security device similar to a deed of trust or mortgage” – falls outside of the Redemption reforms, effective 2008.

As far as I know, however, this form of security arrangement has become so uncommon, that it was completely omitted from consideration in the new law. I think we’ll have to wait until it becomes a legal issue (in some lawsuit) before that question is officially addressed.

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Quiz #9 - Where is the answer in the text? ("If you protest your taxes, you will file the protest with: b. the County Assessor...")

On about page 10-12: "c. The County Board of Equalization... hears appeals from protests filed with the county assessor." The question phrases it "backwards" from the text - but the two passages mean the same thing.

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Quiz #10 - I don’t understand how answer “a” is correct?

Which of the following statements concerning delinquent taxes is untrue?
a. All unpaid taxes become delinquent after June 30th of the year following the year they are assessed
b. All taxes are assessed on January first
c. All taxes are due and payable at the time they are assessed
d. The first half of the taxes are delinquent after the last day of February in the year following the year for which they are assessed.

The question asks which answer is “untrue”, so we have to eliminate the “most true” answers first. Answer “b” is true, because under "Specific Liens... 2. Taxes and assessments" (on about page 10-14): “Property subject to the general ad valorem tax is listed and assessed on the first day of January of the then current year.” Answer "c" is true (therefore) because of the statement in the following paragraph: "Property taxes become due on January first following the year for which issued." Answer "d" is true because of the next sentence: "Property taxes in Colorado may be paid, without penalty, as follows: One-half on or before the last day of February..." (if they are due, and then are not paid, it follows they are delinquent.)

Therefore, answer "a" is "untrue" (and therefore the correct answer) because of the statement in the next paragraph: "On the sixteenth day of June, all unpaid taxes of the preceding year become delinquent and an interest penalty will be assessed in addition to any previous penalty that has accrued. (39-10-104.5 C.R.S.)"

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CHAPTER 11 - PROPERTY MANAGEMENT

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Under SECURITY DEPOSITS-WRONGFUL WITHHOLDING, section 38-12-103(3)(a) (concerning the returning of security deposits), says, “The willful retention of a security deposit in violation of this section shall render a landlord liable for treble the amount of that portion of the security deposit wrongfully withheld from the tenant, together with reasonable attorneys' fees and court costs…”

Then Section 38-12-104 states that willful retention of a security deposit will render the landlord liable for twice the amount of that portion of the security deposit withheld from the tenant. Is the difference due to the fact that when twice the amount is given to the tenant it is because it was under hazardous conditions?

Yes. The first section (which is the most important – for the state license exam - especially because it uses the word treble which confuses people) deals with the landlord’s willful retention of the security deposit (without itemized list, 30 days, etc.) after the lawful termination of a lease by the tenant. In other words, if you move out and the landlord doesn’t return your security deposit within 30 days (or no later than 60 days, if a longer time is specified in the original lease), then you are entitled to treble damages – 3 x the deposit amount – regardless of the condition of the premises when you left.

The second passage deals with hazardous conditions: “38-12-104. Return of security deposit - hazardous condition - gas appliance. Anytime service personnel … become aware of any hazardous condition of a gas appliance… The landlord shall then have seventy-two hours … to have the hazardous condition repaired by a professional…. If the landlord does not have the repairs made within seventy-two hours … and the condition of the building remains hazardous, the tenant may opt to vacate the premises. After the tenant vacates the premises, the lease or other rental agreement between the landlord and tenant becomes null and void …. and the tenant may demand the immediate return of all or any portion of the security deposit …. If the tenant does not receive the entire security deposit … within the time period provided for in this section, the retention of the security deposit shall be deemed willful and wrongful and … shall entitle the tenant to twice the amount of the security deposit and to reasonable attorney fees.”

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Quiz #3 - The answer is c, but I don't understand why it is untrue?

Both parts of that answer (“30 to 90 days, according to the lease”) are nonsense statements, because both are patently false, according to the statute: 38-12-103. Return of security deposit. 1) A landlord shall, within one month after the termination of a lease or surrender and acceptance of the premises, whichever occurs last, return to the tenant the full security deposit deposited with the landlord by the tenant, unless the lease agreement specifies a longer period of time, but not to exceed sixty days.

So, it is actually 30 days according to statute, or no longer than 60 days according to the lease.

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Quiz #5 - An estoppel certificate might be used for other purposes than a lender. Is answer A correct because a lender is one possible recipient and the estoppel certificate always go to a third party rather than the landlord?

The reason the answer is “a”, is because an estoppel certificate is an assurance from the tenant to either the owner’s (landlord’s) new buyer or lender that tenant will not come after them, and will look only to the original owner (landlord) for any refunds due for prepaid rents or deposits. So, the reason it is answer “a” is because it is “tenant’s assurance to the (owner’s) lender”.

Yes – it could be made also to the owner’s buyer, so that answer would also be correct. The answer, however, is not answer “c”, because it is not an assurance by the tenant to the landlord. (In truth, the landlord would probably prefer that the tenant not try to collect from them any refunds due for prepaid rents or deposits.)

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CHAPTER 12 - TAX FACTORS

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Assessment Roll is defined in the chapter as "the total of assessed valuations." How is this computed? Is this really just the total of all assessed property valuations in the area of taxation?

Correct. As Ch. 12 says, “The total of the assessed valuations is known as the assessment roll, assessment tax base or tax roll.” It is also (briefly) discussed in Ch. 10, under “County Board of Equalization” “This board reviews the assessment roll of all taxable property located in the county, as prepared by the assessor…”

The mechanics of how they arrive at the total value of all the properties is way beyond anything I am an expert in, but they basically add up all the assessed values of all the properties in the county and then tax those properties according to the legal (as in “passed by the CO legislature”) tax rate.

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THE $250,000/$500,000 CAPITAL GAINS EXCLUSION
On about page 12-2 it states that the $250,000 ($500,000 for couples) exemption may be used repeatedly, then it says that the $250/$500k exclusion is not possible if it was already used for the prior sale of any residence in the previous two year period. These two statements seem contradictory.

The main thing with the $250k/$500k exclusion (on page 12-2) is that yes - it can be used repeatedly (as opposed to the former exclusion which could only be used once in a lifetime.) What that means is that you can buy House One, sell it, buy House Two, sell it, buy House Three, sell it, etc., etc., and get a $250k exclusion each time. However, you can't do this (exclusion) more often than every two years. For instance, you couldn't sell and buy a house - and get the $250,000 gains exclusion - every single year. This makes sense (to the IRS, at least), because if you bought and sold a house every single year, it would look more like investment deals (and this benefit is only for your primary residence.)

The other requirement: ("2) the homeowners have occupied the property as their residence for at least two of the past five years") also makes sense with this "residency, not investment" requirement.

You also may be confused as to why they think they would need to specify both "occupied the property as their residence for at least two of the past five years" AND "exclusion was not already used for the prior sale of any residence in the previous two year period"... that may seem redundant. For the most part, it is. But since it says that you only have to live in a particular house for two (out of 5) years, it is conceivable that someone would live in house #1 for 2015 & 2016, then live in house #2 for 2016 and 2017 - essentially fulfilling the residency requirement for two separate houses. THEN they sell house #1 in 2011 (and take the $250k exclusion) and then sell house #2 in 2015... They can't do this with house #2, because they "already used [the exclusion] for the prior sale of [another] residence in the previous two year period." (Not to mention that you can't have more than one primary residence.)


THE $250,000/$500,000 CAPITAL GAINS EXCLUSION - PART TWO
Page 12-2 explains the exemption pre-1997 - a homeowner could defer tax on gains from sale of residence if within 2 years of the sale they purchased a new home costing the same or more than the sales price of the former home... Then it says that from 1997 thru 2008, the IRS EXCLUDED $500K from capital gains tax for profits on sale of principal residence of married couples filing jointly. Does this mean the $500K break was eliminated in 2008 and that married couples no longer get this exemption?

The text goes on to say that the taxpayers filing singly were entitled to a $250K exclusion, with ONLY the following restrictions:
(1) exemption could be used repeatedly;
(2) owner must occupy property as residence for 2 of previous 5 years; and
(3) the exclusion was not already used in the previous 2 years.

Then it says that in 2009 owners of vacation homes, second homes or certain rental properties - got less of a capital gains tax break when it came to the sale of that property.

So do you get to use it repeatedly or not? Do you get the exemption at all anymore? Is the one-time 55-and-older exclusion of $125,000 in gain also gone?

Currently, owners who sell their homes can exclude $250K (single)/$500K (married) of GAIN (profit) from being taxed.

From the IRS (Topic 701 - Sale of Your Home)

	If you have a gain from the sale of your main home, you may qualify to exclude all or part of that gain from your income. 
	Publication 523, Selling Your Home, provides rules and worksheets. 
	In general, you are eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least 
	two years out of the five years prior to its sale. Generally, you are not eligible for the exclusion if you excluded the gain from the 
	sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility 
	requirements as well as exceptions to the two year rule. 

This means that you will not be taxed on up to $500,000 of gain (“profit”) from the sale of your home. (When it says “exclude” – it means that you can exclude or eliminate the tax on up to $500K, not that you don’t get the break.)

You can still use it repeatedly, as long as you follow the rules. The main rule is that you are largely prevented from jumping from (selling) your “real” primary residence, to then claiming that your vacation/rental home is now your primary residence, to then selling that and avoiding the gains tax… That vacation/rental home needs to be your “true” primary residence for a couple of years – in order for you to be able to avoid the gains tax.

This may make owning a vacation or rental property problematic for someone who sells it for a profit If you own a primary residence and a vacation or rental property and want to sell the 2nd property and avoid gains tax, possiblity the only recourse is is sell the primary residence, move into the rental for several years and then sell the former-rental/now-primary. Even then, the owner will only be able to avoid (exclude) a percentage of the tax on the gain – based on how long s/he has lived in the second property.

The $125,000 55-and-old exclusion is gone. It was replaced (in the 1997 law) by the rule that you no longer have to roll over the gain into a new home of higher value, and you can use the $250K/$500K exclusion repeatedly (subject to the “2 year” limits).

Now as for the viability of owning a rental. The tax isn’t on “owning” it (you already pay those in the form of property taxes, etc.), or even on the entire sales price… but on the gain or profit from selling it. So, for some (very simplistic) examples: 1) If you buy a rental property for $100,000 and sell it for $105,000, then you aren’t taxed on the whole $105,000 – you are taxed on the $5,000 profit (gain) as if it were regular income; 2) if you buy it for $100,000 and sell it for $99,000 – then you made no profit (gain) then you aren’t taxed on it; finally 3) If you bought it for $100,000 and sold it for $175,000 – then you made quite a profit! Unfortunately, you will definitely get hit by the IRS for that $75,000 gain.

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What does it mean to be deductible or non-deductible?

You are taxed (income tax) based on your gross income, minus any items that the law (IRS) allows you to either “deduct” or “exempt”. So, there’s a list of things you can deduct (subtract) the value from your gross income, so that you are taxed on that lesser amount.

For example, as a business owner I am allowed to “deduct” the cost of expenses incurred in the pursuit of making money. At the bottom line, after I’ve deducted all those expenses – the rest is “profit” (net income). That’s money that I get taxed a percentage of.

Same for personal income: You can deduct, for example, the amount you’ve already paid for sales taxes for some big-ticket items (like autos). The reasoning is that they are not going to tax you on income on which you have already paid taxes. After you’ve deducted (subtracted) all those expenses that they allow you to deduct – the rest is “profit” (net income). That’s money that you (on your individual income taxes) get taxed a percentage of.

Some items are legally not deductible. For instance, although you may sometimes deduct the sales tax for those big-ticket items you purchased this year – you are not allowed to deduct every single penny you have paid in sales tax for day-to-day items, such as groceries.

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On about page 4, it states, “….According to the Colorado Real Estate Commission, a licensed real estate salesperson is an employee of the employing broker. (12-61-101 C.R.S.) Regardless of any characterization to the contrary in the licensee’s employment agreement, the licensee will not be considered an Independent Contractor. Therefore, the employing broker must withhold and pay income taxes on the employed licensee, including Social Security (FICA) from the employed licensee’s commission or paychecks.”

Isn't it true that in "Real Life", virtually ALL brokers are hired as 1099 – Independent Contractors and that no taxes are taken out by the employing company?

In real life brokerages, this is often true: Most Colorado brokers treat their agents as Independent Contractors, in spite of the Colorado law (CRS 12-61-101) that could be interpreted as expecting them to be treated as employees, withhold taxes, etc.

IRS Publication 3508 indicates that a real estate agent may be treated as an Independent Contractor if the brokerage has them sign a written contract (acceptable to the IRS) stating this. For example:

"What this means today is that a broker or agent is treated as though they are an independent contractor and the agent or broker, not the agency, is responsible for all of his or her own taxes.... In order to receive treatment as a statutory nonemployee Internal Revenue Code Section 3508(b)(1) requires a three-fold test be met. First, the person must be licensed. Second, the person's income must be based upon sales and not on hours worked. Third, there must be a written agreement that specifically states the person is being treated as a statutory nonemployee for Federal income tax purposes." (http://www.ejmcpa.com/sold.php)

"To be considered statutory nonemployees, qualified real estate agents... must work pursuant to a written contract that the worker will not be treated as an employee for federal tax purposes." (http://thismatter.com/money/tax/worker-classification.htm)

And keep in mind that this is FEDERAL law, and we are specifically discussing whether COLORADO (R/E Commission) expects or requires that brokerages treat their agents as employees or ICs. Bottom line is that this means that R/E agents are not independent contractors automatically or by default. The way the law works is that the agent is an employee unless the three conditions are fulfilled, the key one being a written and signed conract between brokerage and agent that specifically states that the agent agrees not to have income, FICA, unemployment taxes withheld, don't get paid 401(k) or health insurance, etc.

In other words, if the employer follows some rules - specifically a written contract saying the agent is an Independent Contractor - they still may treat their agents as ICs. (On the other hand, if they do NOT follow these rules carefully, they may find themselves in hot water with the IRS.)

Nevertheless, rest assured that this would never appear on the state license exam; too complex of an issue.

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What does "to withhold tax" mean?

“Withhold” tax means that the government takes (withholds) a portion of your paycheck now, so that when next year you file (calculate and pay) your income taxes for 2013, you won’t have to pay the entire amount of taxes all at once.

A very general example (and not necessarily real-life accurate) would be this: Say you make $30,000 in 2013. The tax-tables when you go to file/pay your 2015 income taxes in early 2016, might say you owe $1,200 taxes on that $30,000 income.

Instead of paying a lump sum of $1,200 the next year (ouch!), your employer should withhold (subtract) $100 per month and send it to the govt. for you (under your “account” – your social secty. num.) That way, next year, you will have already “paid the $1,200 forward” and your taxes for 2013 will have already been paid. No more money owed.

Same thing with the income when someone sells a house. Technically, the “profit” someone makes when they sell a house is taxable as if it were paycheck income. So they should expect to withhold a certain percentage at the sale, so they don’t have to pay that huge chunk of taxes on the sale when they file their income taxes on April 15, the following year.

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What is a "tax-deferred exchange"? And what is the benefit of doing so?

“Tax-deferred Exchanges” are extremely complicated. Here are the basics:

When you sell a property, the profits are taxed. The IRS allows you to “defer” (postpone) paying those taxes if you “exchange” your property with someone else. In other words, you are not actually “selling” your property (which would presumably lead to profit – which the govt can tax you on) you are merely trading it. No profit.

Your income taxes are actually deferred (postponed) until the day you decide to outright sell your property and pocket the sales proceeds. You can even avoid "ever" having to pay the income taxes at all by continuing to exchange properties throughout your entire lifetime! Then, with proper estate planning, you can pass it all to your heirs completely tax-free.

This is called a “1031 Exchange” (after the number of the statute in the IRS tax code) or “Starker Exchange”, and only applies to Income-producing properties, such as apartment buildings or farm land. (So you couldn’t do it on the home you live in.)

The 1031 Exchange process is very complicated and involves many steps – and real estate brokers technically don’t “do” this themselves. (The title company has legal departments which will set this up and conduct the closings, hold the funds so that there is no taxable profits, etc.)

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What is an "Installment Sale"?

An installment sale is one where you sell the property now – but the buyer doesn’t pay you the entire amount now. For example, if you sell a property for $100,000 they may pay you $10,000 per year for the next 10 years. One reason for doing this is because it is a creative way to sell the property when the economy is tough, and the seller gets a guaranteed income over the next 10 years.

One bad thing about selling a property, is what I mentioned above for #3: You get taxed a percentage of your “profit” on the sale. (Example: You bought the property 5 years ago for $60,000 and sale it this year for $100,000. That extra “profit” of $40,000 will get taxed by the govt. If the tax percentage (rate) is 20% you may have to shell out $8,000 right at closing to the IRS!)

In addition, taxes are “progressive”. In other words, the more you make the higher the percentage of taxes you may pay. (Example: Taxes on $10,000 may only be 15%, but taxes on $100,000 may be 25%!) So, one way to save – keep from getting taxed as much – is to split up the payments. If you sold the property and made $100,000 profit all at once – then your 25% taxes would cost you $25,000 this year!

But if you took payments in installments – then you would pay a lower percentage each year. So, in my example in the previous paragraphs, if you took $10,000 payments over 10 years – that $10,000 each year would only be taxed at 15% or $1,500 per year. So, instead of paying $25,000 taxes up front if you took the entire profit all at once, you could spread it out over 10 years and only pay $15,000! (10 years x $1,500).

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Quiz #1, 2, 5, 6, 7, etc. - These Math questions are very detailed and difficult, and there doesn't seem to be enough training in the text to teach me how to make all these calculations. AND will we be asked to make thiese kinds of complicated calculations on the license exam?

The bottom line with the tax chapter and quiz questions that require complicated math calculations - is that it they are not that important. You are not, after all, taking a “tax” course, nor are you preparing for a “tax” career or license exam. You’re not required to be familiar with much more than the basic tax issues and have some idea of how the calculations work (some of the “tricks”) so you could wind your way through a potential issue on the license exam (or in “real life”.) Furthermore, “math” is hard enough as it is, for some people (see Chapter 13) and you’ll get enough of that in the following Chapter 13… So, we’re not going to hammer students with all the minutiae of tax calculations and completely distract you from the big picture. (Take a look again at the Section called “MATH” in that all-important Instructions booklet. This is really what we’re getting at, there.)

So, try not to look at the Quiz Questions as a Math test that we haven’t properly prepared you for. Instead treat it as a brief introduction to a topic, so you will have a basic familiarity on the license exam. As for what you will be tested on the license exam from the Tax Chapter – you will get a better idea when you get to the Uniform final exam and Prep Exam. (This is also why all our tests are open-book, so that you will be able to find and focus on the most important information.)

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Quiz #4 - I am confused by this question.

Tax issues do this to most people! This question comes from page 12-7: “A tax-deferred exchange (1031 exchange) must involve property held for income and investments, and it must be like-for-like property (real property for real property).

“Each party to an exchange keeps the old cost basis, increased by the amount of boot given or decreased by the amount of boot received. Boot is any item of personal property (usually money) given to even up a trade. Debt relief (assuming a lower indebtedness on the property received than on the property given) is considered boot. Boot is taxable as gain to the party receiving it.

An exchange also can be delayed (Starker exchange). A seller of property can indicate that the proceeds be held by an escrow holder to purchase another property. The property must be designated within 45 days of the closing, and the completion must occur within 180 days of the closing.”

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Quiz #5 - This question is much simpler than it looks:

$95,000 - $47,000 = $48,000

Present Sales Price less Original Purchase Price = “gain”. (Remember, “gain” is essentially “profit” – or sometimes loss, if you sold it for less than you bought it.)

You won’t be taxed on the full sales price, but only the “gain”, “profit” or “income” (however it helps for you to think of it). So here, the seller is simply taxed on the difference between Present Sales Price less Original Purchase Price, or“gain”.

The loan figure has nothing to do with “gain” – it is thrown in there as a “red herring”, or a fact that is irrelevant, but tossed in to confuse you.

But – the way to solve this (simple) problem, and any other “math” question, is to start by asking yourself, “What (bare bones) information do I need to know to answer this question?” There may be extra info that is irrelevant, but you can toss that out after you answer your own question.

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Quiz #11 - Why is answer 'c' ('a vacant lot traded for a farm'), and not boot? Wouldn't the income potential or usable food that a farm offers be boot? Especially when compared to a vacant lot?

Simple. As stated, 'a vacant lot traded for a farm' is simply real property being traded for real property. Since, by definition, boot is “Money, personal property or debt relief given to even off a trade” (Glossary, in back of Third Book) and answer “c” does not explicitly state that the farm contains any items of personal property to be traded. It can only be considered “boot” if it is specifically stated to be personal property added to the mix to make up the difference between the values of the real property being traded. For example, if you and I want to trade land and your land is valued at $100,000 and mine is valued at $95,000, I might offer to “throw in” my car (valued at $5,000) to make up the difference and make it an equitable trade. My car is “boot”. (The key distinction – the reason we care – is that even though the $5,000 car is technically “personal property”, since it was included in the trade for real property as boot, it is taxable as real property.

So – the short answer is that there is no personal property specifically stated in the answer – so it cannot be “boot”. (If you have to add/assume facts to an answer to make it correct, then it is not likely to be the answer.)

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Quiz #14 - Why isn’t the answer “d” - $675,000?

The question asks "what will be the cost of improvements." Land is, by definition, not an improvement (structure) so you have to subtract it out from the final calculation. Hence, $675,000 - $30,000 = $645,000.

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Quiz #15 and Quiz #17 - Where is this explained in great detail?

These are pretty obscure concepts to which we definitely did NOT want to devote any of the chapter text. So we introduce the concept in a couple of quick questions, and then leave it at that. Bottom line is that you’ve been exposed to as much of the concepts as you need to know.

As far as explaining #15 – just remember that it is not a very important concept (and it won’t apply to anything you will ever see, because we don't have rent-controlled property, here in Colorado.)

Rent-controlled property has rent that never increases (even with inflation, etc.) So if the property taxes go up, but the income that the owner can derive from it remains the same – then it is worth less to the owner. (Value goes down because the income can’t go up, even when the costs go up.) Value decreases – and more than just the cost of the extra taxes. Therefore, the answer is “d”.

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Quiz #25 - How is this calculated?

The Colorado Dept. of Revenue (the “tax dept.” for state taxes) requires that when out-of-state people sell their Colorado property, they must pay 2% of the sales price in taxes to the state of Colorado (even though they aren’t Colorado residents). If the seller’s proceeds (after all closing expenses) are not enough to reach that 2% amount, then they must pay the entire proceeds left over.

In this case, Pierre and Monique sell their Colorado property for $225,000, so 2% would be $4,500. However, the proceeds to the sellers were only $4,400, so they could only pay that amount.

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CHAPTER 13 - REAL ESTATE MATH

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Why do you use 360 days in a year on math questions?

If you are in the Uniform section (i.e., Chapter 13 - Math), then you use 360 days - with each month having 30 days. If you are in the Colorado or Closings sections (i.e., the Closings worksheet), you use 365 days - with each month having the "normal" number of days (i.e., 31 in January, 28 in February, etc.)

Now, why do we use 360 days at all...? First of all, because you are instructed to do so on page 3 of Chapter 13, under “MATH CONCEPTS – FOR “GENERAL” (“UNIFORM”) EXAM”:
3. Remember to Convert:
c. 1 year = 12 months = 360 days
d. 1 month = 30 days

The other reason is because the Uniform portion of the state exam uses 360 days. Therefore, if you are solving a math question on the Uniform portion of the state license exam (even a "closings" question) - you will use 360 days - with each month having 30 days.

In "real life" - some lenders do use 360 days! Maybe it is for consistency and simplicity, or maybe it is to pull in a few (hundred) extra bucks on closings (because each day will therefore carry a slightly higher amount of interest.)

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In the first example calculation (about page 13-2), after “Equalization Factor” is highlighted, where does the 1000 come from in the equation 27,500/1000?

You will see this same concept applied in Practice Question #2. The 1000 comes from the mill levy which is described in the section right above that first calculation example. Since a mill levy is expressed in terms of “per $1000 of value”, you have to determine the taxes by taking the assessed value by and dividing it by 1000 (and then multiplying that figure by the mill levy or tax rate. In the example on the bottom of page 13-1, that would mean that there are 27.50 mills (assessed value of $27,500 divided by 1000). Take that figure and multiply it by the tax rate/mill levy, and you get your taxes: 27.50 x 80.89 = $2,224.48.

The example goes on to describe an equalization factor which occasionally is used to make the taxes “fairer” for poorer counties (either by taxing the poorer counties less, say, by multiplying by .75… OR by taxing the “richer” counties more, by multiplying it by an EQ factor of, say, 1.25).

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Question #1 - What in this question determines the interest reduction. It goes from 10,000 to 9,900 to 9,800 in answer section. Why $100 in particular.

Because it says the principal payment is $100. The part of the payment that is principal is what reduces the balance of the loan. So, in this case, the principal is $100 each month.

So, after you make the first payment, your (principal) balance is now $9,900 (10,000 - 100) - and then you figure interest only on the remaining balance (9,900 x 12%). Then after your second payment, your balance is now $9,800 (9,900 - 100), etc.

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Question #2 - I understand this question: 80,000 X 50% = 40,000 but…why then is 40,000 divided by 1000?

Because a "mill levy" is 1/1000th of the assessed value. So in order to determine the taxes, you divide the assessed value by 1000 and then take that number and multiply it times the mill levy. See page 13-1 where it describes this: "A mill levy... would be 'the tax rate ...per thousand dollars of assessed value.'"

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Question #5 - I get 9 X 35.10 but why does it add 20 days at $1.17. I understand the $1.17 but why multiply times 20 and not 10? The deal closed the 10th!

Because you are trying to find out what BUYER's tax responsibility is (and what buyer has to pay back the seller). Since seller already paid the taxes (back on July 1), buyer must "pay back" seller for the REST OF THE YEAR STARTING ON SEPT. 10 (= debit buyer / credit seller). So, with September, buyer owes seller for the REST OF September - starting with the 10th, or 20 days. (Then the buyer also owes the seller for 9 full months - October through June of the next year.)

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Question #8 - I subtracted 6 from 100 = 94. The next step I went 23500 divided by .94 and got the correct answer. Why does 94 turn to .94?

Since 94/100 = .94, your method works easily well. And if it works for you - go for it! (As long as you get the correct answer.) But for simplicity's sake, we use the x/100 method so that students who have no familiarity with this kind of basic algebra don't have to take that extra mental step.

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Question #9 - The answer to #8 is $25000, but then this question goes back to what the seller wants for the house ($23,500) instead of what it must be sold for to cover commission. Why isn't this $25000 + the repair and closing costs?

Note that Question #9 doesn't say "assume the same answer"... It says "Assume the same facts" as in Question #8. That means that the answer to #8 does not come into play with Question #9... it means that only the facts of #8 are important: 1) Seller wants to net $23,500 on the sale of his house, 2) after paying the broker a 6% commission. Then, it adds (in Question #9) "also Seller has repair costs of $1,450 and closing costs of $325."

So, Question #9 completely ignores the answer to #8 ($25,000)... we can't use it at all.

When it gives as the answer to #9, "$23,500 + $1,450 + $325 = $25,275", it is saying "Seller needs to net from the sale of his house "$23,500 PLUS $1,450 PLUS $325", or... the total of $25,275.

Then, it goes on to solve what seller needs to sell the house for after taking 6% (the broker's commission) off the top. Just like on Question #8, you take the "must-sell-for price" ($25,275) over "X" and cross-multiply that times 100 ($2,527,500) and divide by 94. Answer: "26,888.30"

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Question #10 - Where did the $187,500 come from and how do I get to the result of @11,250? My calculation got to $11,088: I subtracted 12% of $165,000 then i got $19,800, then I added 165,000 + 19,800 = 184.800 x 0.06 = 11,088

Question #10 tells you to subtract the 12% first (“which was 12 percent less”). And you don’t subtract 12% from the sales price – because that’s like trying to subtract an orange from a basket of apples – you must subtract 12% from ALL the percent – or 100%. So…

100 – 12 = 88

So it is saying, “88% equals the price we were left with, or $165,000. Therefore, what was the full amount before taking away that 12% from 100%?” So we are taking that sentence – with words and numbers – and expressing it in a simple equation with no words, or “88% equals $165,000. So what does 100% equal?”

88 = 165000
100 = ...?...

We get the answer by “cross-multiplying” 100 x 165000 (= 16,500,000) and 88 x ? (=88x) and then dividing the big number by the little number.

16,500,000 / 88 = 187,500.

Lastly, we pay the commission on the sales price: 187500 x .06 = $11,250.

Unfortunately, the numbers on the first equation got pushed over on the answer key, so your confusion is understandable – but that’s how to solve a problem that says, “What is the original amount AFTER you took away a certain percentage?”

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Question #9 - Why would the seller pay the broker commission on the closing and repair costs? Since these occur 'after' the contract, that seems unethical. Wouldn't adding these costs to the $25,000 (selling price plus 6% commission) for an answer of $26775 be more appropriate.

You’re saying that because it seems to be questionable ethics for the broker to take a percentage (commission) on the buyer’s costs? Well… there is a three-fold answer to that: The main reason is that this isn’t an “ethics” or an “agency” question, so you don’t need to be concerned about that. If it asked something like, “Is this ethical?” or “What agency obligation, if any, is violated…?” then the answer might be different. But this is a simple “math” question – not an agency question (it is just asking you for the correct calculation.) For the "fairness" answer, see the next comment, below.

Second – to your point, but not in answer to this actual math question - this is not an ethical violation anyway. The question posits that the seller wants to recover their costs after paying the commission. The broker has instructions not to sell the house for less than the amount that seller would be able to recover their costs. Sure, that means that broker will net incrementally more – but that is normal. Whatever the reason, if the commission is based on a percentage of the sales price then the broker gets that percentage of whatever it sells for – regardless of why it sold for that much.

Finally, in answer to the last part of your question, if it sold for $26,775 would not be selling it for enough to recover both the costs and the commission, and that would be a violation of the seller’s instructions and therefore unethical. The question is saying "Seller needs to net from the sale of his house "$23,500 PLUS $1,450 PLUS $325", or... the total of $25,275.

Then, it goes on to solve what seller needs to sell the house for after taking 6% (the broker's commission) off the top. Just like on Question #8, you take the "must-sell-for price" ($25,275) over "X" and cross-multiply that times 100 ($2,527,500) and divide by 94. Answer: "26,888.30"

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Question #9 - Why does an agent get paid commission on repair costs and closing cost? It doesn't seem right to me.

You’ll think differently when you are the agent and want the commission on the full amount!

It’s a pretty simple answer: The agent gets the commission on the sales price. So, even if the sales price includes repairs or other miscellaneous things, the agent will get the entire commission rate x sales price.

If the parties are smart, therefore, they will include a provision in the contract for excluding those amounts from the commission calculation. And in the interest of good will, the agent will exclude it anyway… after all, if the “repairs” are included and amount to $2000 and the listing agent is getting 3.5%, that’s only $70. It’s worth it to save your clients a little money and they will send referral business your way. (If you nickel-and-dime them to death, they will never recommend you to anyone.)

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Question #11 – I simply can’t understand where you get the number “130”?

For Question #11, we get “130” because if you are looking at an amortization table, it only tells you what is the interest for $1,000. So – if you had a $10,000 loan, you would have to multiply that interest figure by 10, if you had a $100,000 loan you would multiply by 100, if you had a $130,000 loan you multiply whatever figure was in the “$1000” column by 130.

So – it is saying that when you look in the column for $1000 at 11%, it says $9.53. But C has a loan for $130,000 – so we have to take that figure and multiply it by 130, which is (9.53 x 130 =) $1,238.90. That tells us C’s monthly payment is $1,238.90. (Same for D: $10.75 x 130 = $1,397.50 monthly payment.)

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Question #11 - I got 121,550 for D and 316,004 for C, why then in the answer guide does 121,550 balloon to 12,155,000.

Same thing as in Question #8 – We use the "multiply by 100, then divide by the figure on the other side of the equation." (See page 13-2) So in this question you "cross-multiply" 121,500 x 100, then divide by 316,004. This gives you the ultimate answer of 38.46 (%).

You seem more comfortable simply dividing 121,550 by 316,004... and this is fine. But this yields an answer of .3846, which you have to take the next mental step of converting to percent... To convert it to percent, you mentally multiply by 100! (.3846 x 100 = 38.46%) Instead, you multiply it times 100 first, because most people will be "off" by one digit - one way or another - when they multiply a decimal by 100 in their heads. For instance, they would get 3.846% or 384.6%... and guess what - those two answers are very likely to be "trick" (incorrect) choices on a multiple-choice math question on the state exam!

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Question #14 - Again in the answer key, why does 1587.36 which I got, then balloon to 158,360?

Same thing: "Cross-multiply" 1587.36 x 100, then divide by 17,835. Simple as that, you get 8.9%. (Whereas, if you simply divide 1587.36 by 17,835, your calculator will show .089, and most of the time people will mentally - and incorrectly - think this is 89%!... which is guaranteed to be one of the incorrect choices.)

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Questions #14 and 15 - How are these calculated?

This is a basic, fully amortized loan. Although the interest and principal components change with each payment, you can always find out what those components are as of a certain “snapshot” in time.

There are three elements to a payment (besides the principal): the interest rate, the principal balance, and the interest part of this month’s payment. If you are given two of those three elements, you can figure out the remaining element.

The easiest part is to find out the interest of a given payment: Loan Balance x Interest Rate / 12 = Interest payment for that month’s payment. So, for example, if the loan balance is $100,500 and the interest rate is 7%:

$100,000 x .07 = $7,035 per year at this time
$7,035 / 12 = $586.25 interest part of the payment this month

Sure, it will change every month, based on how much of the principal was reduced with the previous payment… but you will always be given that figure if it is important to the question.

For example, it might say, “If the loan payment is $1,000…” then in this case, the principal was $413.75.

It could then go on to ask what the principal balance will be after this payment. Since we were given the loan balance before the payment ($100,500) we now know that the loan balance after this payment is $100,086.25 (100,500 – 413.75).

And so forth.

The other parts are just as easy, including the calculation for #14. We are given that the loan balance is $17,835 and the interest payment is $132.28. (Note that it left out the “principal” part of the payment. As you can see from my explanation, above, this figure won’t help us in finding out the interest rate.) Finding the interest rate is simply a “reverse” of my previous example:

$132.28 x 12 = $1,587.35 (per year at this time)
1587.36 / 17835 = .089

We do it the “long way” so that people who haven’t gone through algebra in a long time will automatically get the answer (8.9%) without having to convert from .089 to 8.9% (a tricky proposition sometimes – which often leads to wrong answers.)

Same thing with Problem #15, which asks for the last element of the “three parts” I talk about, above. We are asked for the (principal) balance of the loan if we already know the interest and interest rate.

957.52 x 12 = 11490.24
1149024 / 12 = $95,752.

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Question #18 - With a closing on December 10th, and December having 31 days, wouldn't there be 21 days left?

No – because there are 360 days in a year (on “Uniform” math questions), therefore 30 days in every month. Therefore, December had 30 days and after December 10 there were only 20 days left!

But this brings up two good points with math questions on the state license exam: 1) Always determine first how many days are in the year and in the month. For instance, even if in “real life” December has 31 days, it may only have 30 in an exam question; 2) Always look at the instructions (either in the individual question, or for the test itself – which is given to you on a laminated card when you enter the exam room) to see who pays for the day of closing – seller or buyer. If it is seller, then they will have the “extra” day of responsibility for payment in any proration, or if it is buyer they will have to pay for the closing day in the proration. Here, the question itself told you, “the seller… was responsible for costs up to and including the day of closing..” so you know that s/he is responsible for the first 10 days, and the buyer is responsible for the last 20.

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Question #21 - Where do you get the numbers to answer this question?

As with every math question – start by taking the numbers “out” of the word problem.

First you have $9,000
Then you increase it by 40% (9000 x 1.4 = 12,600)
Then reduce that number by 30% (12600 x 70% = 8820)
Then determine the commission (8820 x 7% = 617.40)
And subtract that (8820 – 617.40 = 8202.60)

The question asks how much L made or lost (profit or loss) after he sold it, compared to the amount he originally bought it for.

9000 – 8202.60 = 797.40 (loss – because he sold it for less than he bought it.)

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Question #21 - Where does the “1.4” come from?

We could have also said 140% (which is the same thing as 1.4 times). Or, we could have multiplied it by 40% or .4, and then added that amount on top of the original number.

This is because it says that L listed the lot for 40% more than he paid. Since he paid $9,000 and listed it for an additional 40%, he listed it for $9,000 x 1.4, or $12,600.

There really are several different ways to calculate these things. Just "picture" what is being asked and then mentally re-phrase it in the way that feels most comfortable to you.

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Question #24 - How is this calculated?

This is just a two part question. First you have to figure out the answer to the first part (What would be the return – “profit” if someone bought it for $400,000 and got 9% profit on it ($400,000 x 9% = $36,000). And then compare that profit ($36,000) if it represented a 12% return. Another way to say “What is the return on $36,000 at 12%” – using our method – is:

12 = 36,000.
100 .....x

Put into plain English, it is saying if 12 (percent) represents $36,000 (profit), then what is the total amount? (100%). 100 x 36,000 = 3,600,000. 12 times X = 12. Then divide the 3,600,000 by 12(x), and the answer to the question is $300,000.

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Question #28 - On this question and also Question #2, the answer for both problems requires a quarterly sum. On Question #2, the figure is divided by 4. Yet on Question #28, it is divided by 3. Why?

There are three months in a quarter, but four quarters in a year. So the only reason why you would use the number “3” in your calculation is if you have the monthly amount, and are asked what a quarterly payment is.

However, if you are given a yearly amount, and asked what is the quarterly payment is, then you need to divide by four – because there are 4 quarters in a year.

With Question #2, you are left with a yearly figure, and must divide by 4 (quarters) to get the quarterly figure. (The mill levy of $27.94 x 40 mills leaves you with a total of $1,117.60 yearly taxes.)

With Question #28, you also are left with a yearly figure and are asked what is the quarterly amount. With any “interest” question, you have to first multiply the principal times the interest rate. That tells you the yearly amount of interest. (Then, if you are asked what the quarterly amount is you divide by four, if asked what is the monthly amount you divide by 12, etc.)

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Question #29 - Why is the $90,000 mortgage deducted when calculating financing costs?

“Financing costs” means “what it costs to finance the loan”… NOT what will be the total amount of payments. Remember that the payment is made up of principal and interest, and the interest is the cost of financing. Therefore, when it asks what the cost of financing the loan, it is asking what it cost the borrower in interest (and whatever fees, etc. – over-and-above the original loan amt./principal). So, after figuring out the total interest over the life of the loan, we have to take out the original loan amount (here, $90,000).

Question #29 - Why wasn’t the figure for the interest rate of 13 ½% ever used?

The “13 ½%” figure was a “red herring” – a useless distractor – as discussed on the first page of this chapter.

The first thing you need to do with this question – just like every other “math” question – is ask yourself, “What figures do I need to have in order to solve what it is asking for?” Here, the question asks you how much financing costs will increase the cost of the house - and that answer will be in terms of percent. Before doing anything with the actual numbers in the question, we can tell that we will have one figure (the original price) and another figure (the original price PLUS all the financing costs over the year). Then we simply have to figure out how much that increased the cost, and then translate that into a percentage (i.e., “final figure is ‘Q’ percent higher than original figure.”)

It is usually easier to express “math” in words, so here is what the solution to problem #29 is telling you: “The total cost of the payments over the life of the loan (30 yrs x 12 months x monthly payment of $1,030.88) is $371,116.80. But that is total cost, and we need to subtract the original loan amount first ($90,000), because that is what the question is asking us. That figure is $281,116.80 ($371,116.80 total cost MINUS the original loan amount of $90,000.)

Going back and expressing the question in terms of words (since now we know the numbers): “The additional cost of $281,116.80 is what percentage of the original purchase price of $100,000.”

Although we use the term “algebra”, don’t let that scare you, because all that is involved is plugging it into that one formula (“blank over blank is equal to blank over 100”).

This one is easy because the original purchase price was $100,000, and our total “extra” costs over the life of the loan is $281,116.80. So, “$281,116.80 over $100,000 is equal to X over 100” Put another way – and this is VERY important to understanding this whole “formula”: “Compare $281,116.80 to $100,000. If $100,000 was equal to ‘100’ percent, what percent is $281,166.80?”

Cross-multiply the 281,116.80 times 100 (28,110,680) AND 100,000 times X (100,000X) and divide the ‘complete’ number (28,100,680) by the ‘incomplete’ or ‘unknown’ number (ALWAYS) and you get (28,111,680 / 100,000) = 281.1168 percent!

In answer to the ultimate question, we don’t use the “13 ½%” figure because it had nothing to do with what we were trying to find out! Going back to the original question that you have to ask yourself (“What figures do I need to have in order to solve what it is asking for?”) all we needed to figure out THIS answer was 1) the original price, and 2) the original price PLUS all the financing costs over the year.

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Question #31 - How is this calculated

Although the interest and principal components change with each payment, you can always find out what those components are as of a certain “snapshot” in time. There are three elements to a payment (besides the principal): the interest rate, the principal balance, and the interest part of this month’s payment. If you are given two of those three elements, you can figure out the remaining element.

This question deals with these three components: You are given the interest rate and the interest payment. (Again, it leaves out the principal component, which makes things easier.)

Monthly Interest x 12 = yearly interest 923.18 x 12 = 11078.16.

Yearly interest / interest rate = principal balance 11078.16 / .12 = $92,318.

Bottom line is that if you know two of the three components (interest rate, principal balance, interest part of the payment) you can figure out the remaining component.

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Question #32 - How is this calculated

As always, ask yourself “What figures do I need to answer this question?” The question asks “At how much is the property listed… if the monthly net is $810, and the return – on that elusive ‘listing price’ - is 7.5%”. “Return” simply means “that amount ‘over and above’ our price”. The “return” is easy: $810 per month times 12 months (810 x 12), or $9,720.

Put the question into ‘words’ again: “If our ‘return’ is equal to 7.5 percent, then what is 100% (in other words, the TOTAL AMOUNT)?”

So, we are saying “If 7.5 (percent) is equal to $9,720, then what is the TOTAL AMOUNT (100%)?” Numerically, this is on the answer to Question #32: 7.5 over 100 = 9,720 over X. Which really means “7.5 = 9,720, 100 = X… What is X?”

It is telling you, therefore, to Cross-multiply 9,720 times 100… 972,000 (the ‘full’, ‘complete’, or ‘known’ amounts) and 7.5 times X… 7.5X. Divide the ‘complete’ amounts by the ‘incomplete’ or ‘unknown’ amounts (972,000 DIVIDED BY 7.5X), and you get the answer you were looking for all along… $129,600.

Put another way, “If $9,720 return was 7.5% of the original price, what was the original price?”… Answer: $129,600.

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Question #33 - I got the first part, but do not understand where the 130 over 100 comes from. I thought it would be 30% over 100?

It is "130" because of how the first sentence of the question is worded: "30% more than she paid". Then the question finally asks, "What did D originally pay for it?" So, we are being asked for the original price again. The original price, therefore, is "100%", since we are being told at the outset that she "sold it for 130%... 100% PLUS 30%."

Put another way, if you only use "30%", that final amount you get will only "30%" of what she originally paid (in other words, LESS than the original price). She sold it for a PROFIT - 30% MORE than the original price, or 130%!

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