Sample Questions
Question 1
Easy
Under MACRS, residential rental property is depreciated over what recovery period using which depreciation method?
Solution
D 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).
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).
Question 2
Medium
A taxpayer receives property worth 80,000 in exchange for services rendered. The taxpayer's basis in the property immediately after receipt is:
Solution
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.
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.
Question 3
Hard
On November 1, 2025, Brooks sells land to her wholly-owned S corporation for $250,000. Brooks' adjusted basis in the land is $320,000. The fair market value is $250,000. What is the tax consequence to Brooks?
Solution
C 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.
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.
