A landscaper trades a Bobcat skid-steer (adjusted basis $18,000, FMV $32,000) plus $5,000 cash for a larger model worth $37,000. Under post-TCJA §1031, the swap fails because skid-steers are personal property. The landscaper recognizes $14,000 gain immediately and depreciates the new machine on a stepped-up cost basis.
The basis of business assets drives every disposition outcome (gain or loss, depreciation recapture, character). Cost basis under §1012 is cash paid plus FMV of property given plus liabilities assumed plus capitalized acquisition costs (sales tax, freight, installation, legal fees, title insurance). Section 263 requires capitalization of any cost that materially increases value, restores property to like-new condition, or adapts it to a new use. Routine repairs deduct under the de minimis safe harbor of $2,500 per invoice ($5,000 with applicable financial statement) under Reg. §1.263(a)-1(f).
Adjusted basis under §1016 = original basis + capital additions − depreciation allowed or allowable − §179 expense − bonus depreciation − casualty losses − Form 982 cancellation-of-debt reductions.
Common mistakes
- Treating equipment exchanges as §1031. Post-2017, only real property qualifies. A tractor-for-tractor trade is a fully taxable sale plus purchase with §1245 recapture on the relinquished asset.
- Skipping recapture on installment sales. Section §453(i) requires all §1245/§1250 recapture in the year of sale, even with no cash collected. Only the remaining gain spreads under the installment method.
- Using FMV instead of donor's basis for a gain-side gift. §1015 carryover basis applies for gain. FMV-at-gift only sets the loss basis (lesser-of rule).
Bottom line
- Original basis = cost + capitalized acquisition costs (§1012). Adjusted basis = original basis + improvements − depreciation allowed or allowable − §179 − bonus − casualty (§1016)
- Gift basis (§1015): carryover for gain; lesser of carryover or FMV-at-gift for loss; sale price between the two = no gain, no loss. Inherited basis (§1014): FMV at date of death, automatically long-term
- Disposition (§1001): amount realized − adjusted basis = gain/loss. Character: §1221 capital, §1231 quasi-capital, §1245 ordinary recapture on personal property, §1250 unrecaptured gain at max 25% on real property. Form 4797
- §1231 netting: net gain = LTCG, net loss = ordinary, with a 5-year lookback recharacterizing gain as ordinary up to prior net §1231 losses
Exam shortcut
"Allowed or allowable" beats actual depreciation. If the facts say a taxpayer "did not depreciate," basis still drops by what should have been claimed. Use Form 3115 for a §481(a) catch-up. §1031 timing is 45/180 concurrent. Both clocks start the day after the relinquished property transfers. No weekend, holiday, or natural-disaster extension absent a specific IRS announcement. Recapture before installment spread.
The full lesson (about 2,415 words, 16 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- 3
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