Property transactions — CPA TCP practice questions

Under the AMT computation, alternative minimum taxable income (AMTI) equals:

1. Regular gross income multiplied by the flat 28% AMT rate
2. The AMT exemption amount reduced by qualified capital gains
3. The greater of regular tax or the tentative minimum tax computed
4. Regular taxable income plus preferences and adjustments allowed

Answer: D — Regular taxable income plus preferences and adjustments allowed

D) Correct — start with taxable income, add prefs/adjustments, apply the exemption, then the 26/28% rate. A) That is a partial rate calc, not the AMTI base. C) That describes the final AMT liability comparison. B) The exemption reduces AMTI, not the other way around.

An Opportunity Zone investment gives the taxpayer the primary current benefit of:

1. Ordinary-loss treatment on any decline in QOF value during the hold
2. An immediate 20% deduction against the deferred capital gain amount
3. A permanent 50% reduction of the taxpayer's deferred capital gain
4. Tax-free appreciation on the QOF investment if held for 10 or more years

Answer: D — Tax-free appreciation on the QOF investment if held for 10 or more years

D) Correct — 10-year hold makes QOF appreciation tax-free. B) There is no 20% deduction. C) The 10%/15% basis step-ups have largely sunset. A) Losses are capital, not ordinary.

Dynasty trust planning uses jurisdictional flexibility principally to:

1. Guarantee a permanent estate tax exemption for all future beneficiaries
2. Eliminate federal generation-skipping transfer tax on all transfers made
3. Extend trust duration beyond the traditional rule against perpetuities
4. Convert ordinary income into capital gain at the beneficiary level

Answer: C — Extend trust duration beyond the traditional rule against perpetuities

C) Correct — states like SD/NV/DE allow perpetual (or long) trusts. B) The GST tax is not eliminated; the exemption is leveraged. A) There is no permanent estate exemption guarantee. D) Trusts do not convert character of income.

A tax planner is coordinating a client's NUA strategy for employer stock in a 401(k) with the client's broader retirement income plan. Which combination of facts would make NUA treatment MOST advantageous relative to a full IRA rollover?

1. The employer stock has a low basis relative to its current fair market value, and the client is in a high ordinary income tax bracket but would face a lower long-term capital gains rate
2. The employer stock has a basis nearly equal to its fair market value, with minimal appreciation
3. The client plans to donate the entire 401(k) balance to charity immediately upon distribution
4. The client is significantly younger than 55 and has no near-term need for the funds

Answer: A — The employer stock has a low basis relative to its current fair market value, and the client is in a high ordinary income tax bracket but would face a lower long-term capital gains rate

A) Correct — NUA is most advantageous when there's substantial appreciation (low basis relative to FMV) to convert from ordinary-rate IRA-style taxation into favorable long-term capital gains treatment, especially valuable for a client otherwise facing a high marginal ordinary rate versus the lower LTCG rate on the bulk of the value. B) Incorrect — with minimal appreciation, there's little NUA benefit to capture since almost the entire value would be taxed as ordinary income (the basis portion) regardless of strategy, negating the primary NUA advantage. C) Incorrect — charitable giving intentions don't specifically drive the NUA-vs-rollover analysis; other planning tools (like a QCD from an IRA) might be more relevant depending on the charitable vehicle. D) Incorrect — NUA requires a qualifying triggering event; being significantly younger than the typical triggering ages/events without another qualifying event (like separation from service) may limit availability, and this fact alone doesn't specifically drive the advantage analysis being asked about here.

A reverse §1031 exchange is distinguished by the taxpayer's:

1. Deferral of gain for more than 180 days after the initial acquisition
2. Ability to receive cash boot without triggering any gain recognition
3. Acquisition of the replacement property before disposing of the relinquished
4. Exchange of foreign real property for domestic US real property held

Answer: C — Acquisition of the replacement property before disposing of the relinquished

C) Correct — reverse exchanges use an EAT to park replacement property. A) 180-day rule still applies. B) Boot always triggers gain. D) Foreign for domestic is not like-kind under §1031.

Combining §121 and §1031 requires the taxpayer to first:

1. Convert the property into a §1031 like-kind investment and then sell it
2. Elect out of §1031 first, then claim §121 on the primary residence sale
3. Immediately exchange it for a like-kind property and then move back in
4. Convert the property to rental/investment use for a sufficient period

Answer: D — Convert the property to rental/investment use for a sufficient period

A) Selling defeats §1031 treatment. D) Correct — convert to investment property, hold, then exchange (with §121 on the residence portion). C) Immediate exchange skips the conversion holding period. B) The elections apply in the opposite order.

A foreign individual sells a US real property interest for $2 million. Under FIRPTA, the buyer (as withholding agent) is generally required to:

1. Withhold nothing, since FIRPTA applies only to US persons, not foreign sellers
2. Withhold generally 15% of the amount realized on the sale and remit it to the IRS, ensuring tax collection on a foreign seller's US real property gain
3. Withhold 100% of the sale price and remit the entire amount to the IRS
4. Withhold only if the foreign seller fails to file a US tax return within 90 days

Answer: B — Withhold generally 15% of the amount realized on the sale and remit it to the IRS, ensuring tax collection on a foreign seller's US real property gain

A) Incorrect — FIRPTA specifically targets dispositions of US real property interests BY FOREIGN PERSONS; it doesn't apply the same way to US-person sellers, who are already subject to normal US tax reporting. B) Correct — FIRPTA generally requires the buyer (as withholding agent) to withhold 15% of the amount realized (here, $300,000 on a $2 million sale, absent an applicable exception or reduced withholding certificate) and remit it to the IRS, ensuring the IRS collects tax on the transaction even though the seller is a foreign person who might otherwise be difficult to collect from directly. C) Incorrect — the standard withholding rate is 15% of the amount realized, not the entire 100% of the sale price. D) Incorrect — FIRPTA withholding is generally required AT THE TIME OF CLOSING regardless of the seller's subsequent filing behavior; it isn't contingent on a later filing failure.

With 100% bonus depreciation restored permanently, which planning consideration becomes MOST important when a profitable business plans large equipment purchases?

1. Bonus depreciation now requires ADS straight-line lives
2. Timing acquisitions and placed-in-service dates to match high-income years, while watching interactions such as the business interest limitation and state nonconformity
3. Avoiding bonus depreciation entirely because it always triggers AMT
4. Electing out of bonus is no longer permitted

Answer: B — Timing acquisitions and placed-in-service dates to match high-income years, while watching interactions such as the business interest limitation and state nonconformity

A) ADS is the alternative system; bonus operates under regular MACRS. B) Correct — permanence makes timing, income matching, Section 163(j) effects, and state decoupling the live planning issues. C) Corporate AMT concerns apply narrowly; bonus is not automatically an AMT trap. D) Election out by class remains available and is itself a planning tool.

A real estate investor is executing a like-kind exchange involving multiple relinquished properties and multiple replacement properties, coordinated through a qualified intermediary (QI). The QI's role in this transaction is essential primarily because:

1. The QI provides tax advice and prepares the investor's tax return
2. The QI holds the sale proceeds (preventing the taxpayer's actual or constructive receipt of cash) and coordinates the multi-party documentation, which is necessary for the transaction to qualify as a true exchange rather than a taxable sale followed by a separate purchase
3. The QI is required only for exchanges involving a single relinquished and single replacement property
4. The QI's involvement is optional and provides no meaningful function in a multi-asset exchange

Answer: B — The QI holds the sale proceeds (preventing the taxpayer's actual or constructive receipt of cash) and coordinates the multi-party documentation, which is necessary for the transaction to qualify as a true exchange rather than a taxable sale followed by a separate purchase

A) Incorrect — a QI's role is to facilitate the exchange mechanics (holding funds, coordinating assignments), not to provide tax advice or prepare tax returns, which remain the taxpayer's own responsibility (typically with her own tax advisor). B) Correct — the QI's essential function is holding the sale proceeds from the relinquished property sale(s) so the taxpayer never has actual or constructive receipt of the cash, and coordinating the necessary multi-party assignment documentation across potentially several relinquished and replacement properties — this structure is precisely what allows the transaction to qualify as a true like-kind EXCHANGE under §1031 rather than being treated as a taxable sale followed by an unrelated purchase. C) Incorrect — QI involvement is equally (if not more) important in complex multi-asset/multi-party exchanges, not limited to simple single-property exchanges. D) Incorrect — the QI's role is essential, not optional, for preserving the tax-deferred exchange characterization in the eyes of the IRS.

The 2024 annual gift tax exclusion per donee per donor is:

1. $15,000, with unlimited direct payments allowed for tuition or medical
2. $17,000, with unlimited direct payments allowed for tuition or medical
3. $18,000, with unlimited direct payments allowed for tuition or medical
4. $100,000, with unlimited direct payments allowed for tuition or medical

Answer: C — $18,000, with unlimited direct payments allowed for tuition or medical

C) Correct — 2024 annual exclusion is $18,000. B) $17,000 was the 2023 amount. A) $15,000 was the 2018–2021 level. D) $100,000 is a lifetime QCD reference, not gift exclusion.

§1031 timing requirements?

Identify replacement property within 45 days; close within 180 days (or due date of tax return).

FIRPTA (Foreign Investment in Real Property Tax Act)?

Requires withholding (generally 15% of the amount realized) on a foreign person's disposition of a US real property interest, ensuring the IRS collects tax on gain that a foreign seller might otherwise avoid reporting.

Voluntary disclosure practice?

IRS-CI's VDP allows taxpayers with willful non-compliance (including unreported foreign accounts/crypto) to come forward proactively, generally avoiding criminal prosecution in exchange for full cooperation and payment.

Reverse §1031 exchange?

Replacement property is acquired BEFORE the relinquished property is sold, using an Exchange Accommodation Titleholder (EAT) to hold title temporarily under Rev. Proc. 2000-37 safe harbor — used when a great replacement property is found first.