Property Transactions and Basis Rules
Property transactions are among the most complex and frequently tested areas on the TCP section of the CPA exam. This cheat sheet covers basis determination, gain/loss character, and key nonrecognition rules.
Basis by Acquisition Method
| Method | Basis Rule | Holding Period |
|---|---|---|
| Purchase | Cost (price + capitalized costs) | Begins on acquisition date |
| Gift | Gain basis: donor's AB. Loss basis: lower of AB or FMV at gift date | Tacks donor's period (if gain basis used) |
| Inheritance | FMV at date of death (or alternate valuation date) | Always long-term |
| Personal to business conversion | Lower of AB or FMV at conversion (for loss/depreciation) | Begins at conversion date |
Gain/Loss Character: Sections 1231, 1245, 1250
| Section | Property Type | Gain Treatment | Loss Treatment |
|---|---|---|---|
| Section 1231 | Depreciable business property + real property held >1 year | LTCG (after netting; subject to 5-year lookback) | Ordinary loss |
| Section 1245 | Depreciable personal property (equipment, vehicles) | Ordinary income to extent of depreciation; excess is Section 1231 | Ordinary loss |
| Section 1250 | Depreciable real property (buildings) | Ordinary income on excess depreciation over SL; 25% rate on unrecaptured gain | Ordinary loss |
Key ordering: Apply Section 1245/1250 recapture FIRST, then net remaining Section 1231 gains and losses.
Like-Kind Exchange (Section 1031)
| Element | Rule |
|---|---|
| Qualifying property | Real property held for business or investment (not inventory, stocks, or personal use) |
| Identification period | 45 days after transfer |
| Exchange period | 180 days after transfer (or return due date, if earlier) |
| Realized gain | FMV received + boot received - AB of property given |
| Recognized gain | Lesser of realized gain or boot received |
| New property basis | FMV of new property - deferred gain |
Installment Sales (Section 453)
| Component | Formula |
|---|---|
| Gross Profit % | Gross Profit / Contract Price |
| Annual gain | Cash received x Gross Profit % |
Exceptions: Losses, inventory, dealer sales cannot use installment method. All Section 1245/1250 depreciation recapture is recognized in the year of sale.
Capital Gains and Losses Summary
| Category | Tax Rate | Holding Period |
|---|---|---|
| Short-term capital gain | Ordinary income rates | 1 year or less |
| Long-term capital gain | 0%, 15%, or 20% | More than 1 year |
| Collectibles gain | 28% | More than 1 year |
| Unrecaptured Section 1250 | 25% | More than 1 year |
Net capital loss deduction: Up to $3,000 per year against ordinary income ($1,500 MFS). Excess carries forward indefinitely.
Practice property transaction questions with TCP mini exams and review with CPA flashcards. Create a free account to access all study tools.