Property Transactions for the CPA Exam
Property transactions are heavily tested on the TCP section of the CPA exam. CPAs must understand how to determine basis, calculate gains and losses, classify property, and apply nonrecognition provisions.
Determining Basis
The basis of property depends on how it was acquired:
- Purchased property: Cost basis includes the purchase price plus all costs necessary to acquire and prepare the asset for use (sales tax, freight, installation, legal fees).
- Gifted property (Section 1015): Donee takes the donor's adjusted basis for gain purposes. For loss purposes, the basis is the lesser of the donor's basis or the FMV at the date of the gift. If the gift tax was paid, basis may be increased by a portion of the gift tax attributable to the appreciation.
- Inherited property (Section 1014): Basis is stepped up (or down) to FMV at the date of death (or alternate valuation date if elected). This eliminates all built-in gain or loss.
- Property received in a Section 351 exchange: Shareholder takes a substituted basis equal to the basis of property transferred, adjusted for gain recognized and boot received.
Capital Gains and Losses
The character of gain or loss depends on the type of asset and the holding period:
| Asset Type | Short-Term (1 year or less) | Long-Term (more than 1 year) |
|---|---|---|
| Capital assets | Ordinary income rates | 0%, 15%, or 20% (plus 3.8% NIIT) |
| Section 1231 assets | Ordinary | Net gain: capital; Net loss: ordinary |
| Section 1245 assets | Ordinary (recapture) | Ordinary to extent of depreciation taken |
| Section 1250 assets | Ordinary | 25% rate on unrecaptured Section 1250 gain |
| Collectibles | Ordinary rates | 28% maximum rate |
Like-Kind Exchanges (Section 1031)
Section 1031 allows deferral of gain on the exchange of like-kind real property held for productive use in a trade or business or for investment:
- Qualifying property: Only real property qualifies after the 2017 TCJA. Personal property, inventory, stocks, bonds, and partnership interests do not qualify.
- Like-kind requirement: Broadly interpreted for real property. Improved and unimproved land are like-kind. Domestic real property cannot be exchanged for foreign real property.
- Boot: Non-qualifying property received (cash, mortgage relief, personal property). Gain is recognized to the extent of boot received.
- Basis of replacement property: Basis of property given up, plus gain recognized, minus boot received, plus boot paid.
- Timeline requirements: Replacement property must be identified within 45 days and received within 180 days of the transfer.
Involuntary Conversions (Section 1033)
Gain from an involuntary conversion (theft, casualty, condemnation) may be deferred if the taxpayer reinvests the proceeds in similar or related-use property. The replacement period is generally 2 years (3 years for condemned real property). The basis of the replacement property is its cost minus the deferred gain.
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