Free CPA TCP (Tax Compliance & Planning) Property Transactions Practice Questions
Property transaction taxation on the CPA TCP exam covers advanced basis concepts, installment sale reporting, related-party transaction rules, Section 1031 like-kind exchanges, cost segregation, and accelerated depreciation strategies.
Sample Questions
Question 1
Easy
Under MACRS, what is the recovery period for nonresidential real property placed in service after 2017?
Solution
C is correct.
Under MACRS (IRC Section 168), nonresidential real property is depreciated over 39 years using the straight-line method with the mid-month convention. This applies to commercial buildings such as office buildings, warehouses, retail stores, and factories.
Under MACRS (IRC Section 168), nonresidential real property is depreciated over 39 years using the straight-line method with the mid-month convention. This applies to commercial buildings such as office buildings, warehouses, retail stores, and factories.
Question 2
Medium
A taxpayer purchases qualified improvement property (QIP) for $500,000 and places it in service in 2025. The taxpayer does not elect Section 179. Under current MACRS rules, how is the property depreciated?
Solution
D is correct.
Qualified improvement property (QIP) was assigned a 15-year recovery period by the CARES Act, correcting the TCJA drafting error that had inadvertently given QIP a 39-year life. QIP uses the straight-line method (as it is real property) with a half-year convention. QIP is also eligible for bonus depreciation. Under the TCJA phase-down schedule, bonus depreciation is 100% for property placed in service through September 27, 2017-2022, then phases down: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027. For 2025, the bonus depreciation rate is 40%, so 200,000 is immediately deducted (40% of 500,000) and the remaining 300,000 is depreciated straight-line over 15 years. QIP is not depreciated over 39 years (that was the pre-CARES Act treatment). The 100% bonus expired after 2022. QIP is not 7-year property.
Qualified improvement property (QIP) was assigned a 15-year recovery period by the CARES Act, correcting the TCJA drafting error that had inadvertently given QIP a 39-year life. QIP uses the straight-line method (as it is real property) with a half-year convention. QIP is also eligible for bonus depreciation. Under the TCJA phase-down schedule, bonus depreciation is 100% for property placed in service through September 27, 2017-2022, then phases down: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027. For 2025, the bonus depreciation rate is 40%, so 200,000 is immediately deducted (40% of 500,000) and the remaining 300,000 is depreciated straight-line over 15 years. QIP is not depreciated over 39 years (that was the pre-CARES Act treatment). The 100% bonus expired after 2022. QIP is not 7-year property.
Question 3
Hard
A business sells equipment (Section 1245 property) for $275,000. The equipment was purchased for $240,000, and accumulated depreciation is $160,000. How is the gain characterized?
Solution
D is correct.
Section 1245 recapture: gain up to accumulated depreciation is ordinary income; any remaining gain is Section 1231 gain.
| Item | Amount | Why |
|---|---|---|
| Sale price | $275,000 | Amount realized |
| Adjusted basis | ($80,000) | $240,000 cost \minus $160,000 depreciation |
| Total gain | $195,000 | $275,000 \minus $80,000 |
| Ordinary income recapture | $160,000 | Lesser of depreciation ($160,000) or total gain ($195,000) |
| **Section 1231 gain** | **$35,000** | $195,000 \minus $160,000 remaining |
Section 1231 gain is taxed at long-term capital gains rates if net Section 1231 gains exceed losses for the year.
Section 1245 recapture: gain up to accumulated depreciation is ordinary income; any remaining gain is Section 1231 gain.
| Item | Amount | Why |
|---|---|---|
| Sale price | $275,000 | Amount realized |
| Adjusted basis | ($80,000) | $240,000 cost \minus $160,000 depreciation |
| Total gain | $195,000 | $275,000 \minus $80,000 |
| Ordinary income recapture | $160,000 | Lesser of depreciation ($160,000) or total gain ($195,000) |
| **Section 1231 gain** | **$35,000** | $195,000 \minus $160,000 remaining |
Section 1231 gain is taxed at long-term capital gains rates if net Section 1231 gains exceed losses for the year.