Property Transactions
Property transactions are one of the most complex areas tested on the TCP section of the CPA exam. CPAs must know how to calculate basis, determine the character of gains and losses, and apply nonrecognition provisions that allow taxpayers to defer or exclude recognized gains.
Basis Determination
| How Acquired | Basis Rule | Key Points |
|---|---|---|
| Purchase | Cost basis | Includes purchase price plus capitalized costs (sales tax, freight, installation) |
| Gift | Dual basis rule | Gain basis: donor's adjusted basis. Loss basis: lower of donor's AB or FMV at gift date. If sale price falls between, no gain or loss. |
| Inheritance | FMV at date of death | Stepped-up (or stepped-down) basis. Alternate valuation date (6 months) may be elected. Holding period is always long-term. |
| Conversion | Lower of AB or FMV | For loss/depreciation purposes when converting personal-use property to business use |
Gain/Loss Character
| IRC Section | Property Type | Gain Treatment | Loss Treatment |
|---|---|---|---|
| Section 1231 | Depreciable business property and real property held over 1 year | Long-term capital gain (after netting) | Ordinary loss |
| Section 1245 | Depreciable personal property (equipment, machinery) | Ordinary income to extent of depreciation taken; excess is Section 1231 gain | Ordinary loss |
| Section 1250 | Depreciable real property (buildings) | Ordinary income on excess depreciation over straight-line; 25% rate on unrecaptured Section 1250 gain | Ordinary loss |
Like-Kind Exchanges (IRC Section 1031)
Like-kind exchanges allow deferral of gain on qualifying property exchanges:
- Qualifying property: Real property held for business or investment use (not inventory, securities, or personal-use property)
- Identification period: 45 days after transfer of relinquished property
- Exchange period: 180 days after transfer (or tax return due date, if earlier)
- Boot: Non-like-kind property received triggers gain recognition to the lesser of realized gain or boot received
- Basis of replacement property: FMV of replacement property minus deferred gain
Installment Sales (IRC Section 453)
- Gross profit percentage: Gross profit divided by contract price
- Annual gain recognition: Payments received multiplied by gross profit percentage
- Interest: Imputed at the applicable federal rate if stated rate is below the minimum
- Depreciation recapture: All Section 1245/1250 recapture is recognized in the year of sale, not deferred
- Ineligible transactions: Inventory sales, dealer dispositions, and losses cannot use the installment method
Involuntary Conversions (IRC Section 1033)
Gain from involuntary conversions (condemnation, casualty, theft) may be deferred if the taxpayer reinvests in similar-use property within the replacement period (2 years for most property, 3 years for condemned real property).
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