California Real Estate Practice Exam

What is deducted from potential gross income to arrive at an effective gross income?

1. Operating expenses

2. Capital expenditures

3. Vacancy and collection loss

4. Property taxes

The correct answer is: Vacancy and collection loss

Potential gross income is the total income a property could generate if fully occupied and all rents were collected. To arrive at an effective gross income, vacancy and collection loss must be deducted from potential gross income. This is because not all units may be occupied at all times, and there may be some non-paying tenants. Operating expenses and property taxes may also be deducted to arrive at net operating income, but they are not the correct deductions for arriving at effective gross income. Capital expenditures may be deducted for tax purposes, but are not relevant to determining effective gross income.