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US Certified Public Accountant (AICPA Uniform CPA Examination) · Taxation and Regulation

CPA REG Federal taxation of property transactions: practice questions with answers

6 free exam-style questions on Federal taxation of property transactions for CPA REG Taxation and Regulation. Try each one, then open the answer to read the explanation. Fincora has 36 original questions on this syllabus area.

Question 1

Nomvula Ndlovu bought her home in 2014 for $310,000, of which $60,000 was allocable to the land. In 2019 she added a room for $25,000. On June 1, 2026 she moved out and converted the house to a residential rental. On that date the property was worth $290,000, of which $70,000 was allocable to the land. She had never claimed depreciation on the house. What is her basis for depreciating the rental building?

  1. A $220,000
  2. B $230,000
  3. C $275,000
  4. D $290,000
Show the answer

Answer: A. When personal-use property is converted to business or rental use, its basis for depreciation is the lower of its adjusted basis or its fair market value on the date of conversion (Treas. Reg. §1.168(i)-4(b) and §1.167(g)-1). Land is excluded from both figures.

- Adjusted basis of the building = $310,000 - $60,000 + $25,000 = $275,000
- FMV of the building at conversion = $290,000 - $70,000 = $220,000

Depreciable basis = lower of $275,000 and $220,000 = $220,000.

Question 2

On March 3, 2026 Bartholomew Achterberg received 400 shares of a listed company as a gift from his aunt. Her adjusted basis in the shares was $18,000 and their fair market value on the date of the gift was $12,500. No gift tax was paid. On October 20, 2026 Bartholomew sold all 400 shares for $15,200. What gain or loss does Bartholomew recognize on the sale?

  1. A $2,700 capital gain
  2. B $2,800 capital loss
  3. C No gain or loss
  4. D $5,500 capital loss
Show the answer

Answer: C. For property received by gift whose fair market value at the gift date is below the donor's adjusted basis, §1015(a) gives the donee two bases:

- Gain basis = donor's basis = $18,000
- Loss basis = lower of donor's basis or FMV at the gift date = $12,500

Sale price $15,200: using the gain basis there is no gain ($15,200 < $18,000); using the loss basis there is no loss ($15,200 > $12,500). So Bartholomew recognizes no gain or loss.

Question 3

Haruto Ellison's father bought a parcel of investment land in 2009 for $64,000. On August 10, 2025 he gave the land to Haruto when its fair market value was $51,000. No gift tax was paid. Haruto held it as an investment and sold it on June 2, 2026 for $46,000. How is the result of the sale reported on Haruto's 2026 return?

  1. A $5,000 short-term capital loss
  2. B $18,000 long-term capital loss
  3. C $5,000 long-term capital loss
  4. D $18,000 short-term capital loss
Show the answer

Answer: A. Gifted property whose FMV at the gift date ($51,000) is below the donor's basis ($64,000) takes a loss basis equal to that FMV (§1015(a)).

Loss = $46,000 - $51,000 = $5,000.

Holding period: the donor's holding period tacks on (§1223(2)) only when the donee's basis is determined by the donor's basis. Because the loss is measured from FMV, Haruto's holding period begins on August 10, 2025 (Treas. Reg. §1.1223-1(b)). He sold on June 2, 2026, less than one year later, so the loss is short-term.

Question 4

On April 8, 2025 Felicity Oduya bought 300 shares of Pembrook Instruments Inc. for $54 a share. She sold all 300 shares on December 14, 2026 for $41 a share. On December 28, 2026 she bought 200 shares of Pembrook Instruments Inc. for $43 a share. Ignore commissions. What loss does Felicity recognize in 2026, and what is her basis in the 200 shares bought on December 28?

  1. A Recognized loss $3,900; basis $8,600
  2. B Recognized loss $0; basis $12,500
  3. C Recognized loss $1,300; basis $8,600
  4. D Recognized loss $1,300; basis $11,200
Show the answer

Answer: D. Loss realized = 300 x ($54 - $41) = $3,900.

Felicity bought substantially identical shares within 30 days after the sale, so §1091 disallows the loss on the number of shares replaced (200 of 300).

- Disallowed loss = $3,900 x 200/300 = $2,600
- Recognized loss = $3,900 - $2,600 = $1,300
- Basis of replacement shares = 200 x $43 + $2,600 = $11,200 (§1091(d))

The holding period of the replaced shares (from April 9, 2025) tacks on to the 200 new shares.

Question 5

On April 1, 2026 Nolan Westfall bought a self-storage facility to rent out. He financed it with a $1,200,000 mortgage payable over 15 years. At closing he paid a loan origination fee of $7,200, a $1,800 appraisal required by the lender and $3,000 for an owner's title insurance policy. What amount of these closing costs can Nolan deduct as amortization for 2026?

  1. A $360
  2. B $450
  3. C $600
  4. D $9,000
Show the answer

Answer: B. Costs of getting a loan to acquire business or rental property (origination fees, lender-required appraisals, credit reports) are capitalized and amortized over the term of the loan. Costs of acquiring the property itself, such as owner's title insurance, are added to the property's basis instead.

- Loan costs = $7,200 + $1,800 = $9,000
- 2026 amortization = $9,000 / 180 months x 9 months (April to December) = $450

The $3,000 title insurance is added to the basis of the land and building.

Question 6

On July 9, 2026 Hollowmere Veterinary LLC bought all the assets of a veterinary clinic. The purchase price allocation included goodwill of $270,000, a four-year covenant not to compete from the seller of $54,000 and a customer list of $36,000. What is Hollowmere's 2026 amortization of these intangibles?

  1. A $3,000
  2. B $12,000
  3. C $16,950
  4. D $24,000
Show the answer

Answer: B. Goodwill, customer lists and covenants not to compete entered into with the acquisition of a trade or business are §197 intangibles, amortized straight-line over 15 years (180 months) beginning with the month of acquisition.

Total = $270,000 + $54,000 + $36,000 = $360,000; 2026 amortization = $360,000 / 180 x 6 = $12,000.

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