Tax Implications & Benefits Flashcards
6 cards from real CES practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Tax Implications & Benefits flashcards as text
What is the primary tax benefit of completing a successful 1031 exchange?
Answer: Deferral of capital gains tax on the sale of investment property
A 1031 exchange defers — but does not eliminate — capital gains tax, allowing the taxpayer to reinvest the full proceeds.
Under IRC Section 1031, what happens to the taxpayer's basis in the replacement property?
Answer: It carries over from the relinquished property (substituted basis)
The taxpayer's basis in the replacement property is the substituted basis — generally the adjusted basis of the relinquished property carried forward.
What is depreciation recapture, and how does it affect a 1031 exchange?
Answer: Depreciation recapture is deferred along with the capital gain in a successful 1031 exchange
In a successful 1031 exchange, depreciation recapture (taxed at 25%) is also deferred along with the capital gain.
If a taxpayer continuously completes 1031 exchanges throughout their lifetime and holds the final property until death, what happens to the deferred gain?
Answer: The gain is permanently eliminated through the step-up in basis at death
Heirs receive a stepped-up basis to fair market value at the date of death, permanently eliminating all deferred gain from prior 1031 exchanges.
Which tax rate applies to unrecaptured Section 1250 depreciation when it becomes taxable?
Answer: 25%
Unrecaptured Section 1250 depreciation is taxed at a maximum rate of 25% when recognized.
A taxpayer has a realized gain of $300,000 on the sale of investment property. They complete a 1031 exchange for a property of equal value. What is the recognized gain?
Answer: $0
In a fully qualifying 1031 exchange with no boot received, the recognized gain is zero — the entire $300,000 is deferred.