Free CPA REG (Taxation & Regulation) Federal Taxation of Property Transactions Practice Questions

A is correct. Under IRC Section 168(c), residential rental property (defined as a building where 80% or more of the gross rental income is from dwelling units) has a recovery period of 27.5 years. It must use the straight-line depreciation method with the mid-month convention (placed in service in the middle of the month).
Choice D is incorrect because the 39-year recovery period applies to nonresidential real property, not residential rental property.
Choice C is incorrect because the recovery period is 27.5 years with straight-line depreciation, not 15 years with 150% declining balance.
Choice B is incorrect because residential rental property does not use a 20-year recovery period or accelerated depreciation methods.

C is correct. When a taxpayer receives property in exchange for services, the fair market value of the property is included in gross income as compensation under IRC Section 61. Under the tax cost basis rule (IRC Section 1012), the taxpayer's basis in the property equals the amount paid or recognized as income. Because 80,000 was included in income, the taxpayer's basis is 80,000. This ensures that any subsequent appreciation or depreciation is properly measured from that basis.
Choice A is incorrect because property received for services does not take a substituted basis from the transferor; it takes a cost basis equal to the income recognized.
Choice B is incorrect because while the fair market value of services rendered and the fair market value of property received are usually equal in arm's-length transactions, the basis is pegged to the FMV of the property received and the amount included in income, not the FMV of services as a separate concept.
Choice D is incorrect because no such cap rule exists; basis equals the amount recognized in income without reference to opportunity cost.

D is correct. Under Section 267, losses on sales between related parties are disallowed. A taxpayer and a corporation are related when the taxpayer owns more than 50% of the outstanding stock. Brooks owns 100% of the S corporation, making them related parties. The entire \$70,000 loss (\$250,000 - \$320,000) is disallowed. If the corporation later sells the property at a gain, that gain is reduced (but not below zero) by Brooks' disallowed loss.