California Real Estate Practice Exam

Tax benefits regarding bonds issued under the 1911 Street Improvement Act allow property owners to:

1. Deduct principal payments

2. Exclude bond interest from income tax

3. Deduct both principal and interest payments

4. Report principal payments as taxable income

The correct answer is: Deduct principal payments

The correct understanding regarding tax benefits for property owners related to bonds issued under the 1911 Street Improvement Act is that property owners can typically exclude bond interest from income tax. This means that when property owners receive interest payments from these bonds, they do not need to report that income on their tax returns, thereby reducing their overall tax liability. The rationale for this exemption is that it serves as an incentive for home and property owners to support local public improvement projects funded by such bonds. By not taxing the interest earned on these bonds, the government encourages investment in community infrastructure, which can ultimately boost property values and enhance the quality of life in those areas. Regarding principal payments, while these are indeed significant components of the overall cost of the bonds, they are not typically treated as deductible payments for tax purposes. This differs from interest payments, which may often have favorable treatment. Hence, property owners would not be able to deduct principal payments from their taxable income.