California Real Estate Practice Exam

Assume the streets in a subdivision were financed through the issuance of 1911 Street Improvement Act Bonds. When he prepares his income tax return, the:

1. Owner of liened lot can deduct only principal payments

2. Owner of the liened lot can deduct principle and interest payments on the bonds

3. Bond holder must report principle payment received as taxable income

4. Bond holder need not declare the interest as income

The correct answer is: Owner of liened lot can deduct only principal payments

The scenario refers to the 1911 Street Improvement Act Bonds, which are commonly used to finance street improvements in California. Understanding the nature of these bonds and their tax implications is critical for the property owner and the bondholder. The correct choice indicates that the owner of the liened lot can deduct only the principal payments. This is based on the tax treatment of payments made toward such bonds. When property owners pay principal on bonds, it does not count as a deductible expense for income tax purposes; however, this option specifies the deductibility of principal payments, which typically do not generate tax deductions. It's important to note that interest payments on these bonds, which are often part of the total payment made towards these improvements, are generally not deductible in the context of personal property taxes. Instead, they can be treated differently for tax reporting purposes. For the bondholder, various other tax implications also arise. Principal payments are usually not considered taxable income when received; however, the interest earned on the bonds is required to be recognized as taxable income. Therefore, only principal payments, in the context of the deductible items for a property owner, is the focus here. This aligns with the understanding of taxation on the involved parties in relation to 1911 Street Improvement