CES Tax Implications & Benefits

Question 1

What is the primary tax benefit of completing a successful 1031 exchange?

Accepted Answer

Deferral of capital gains tax on the sale of investment property

Answer

Permanent elimination of capital gains tax

Answer

Reduction of property tax on the replacement property

Answer

Elimination of depreciation recapture on all future sales

Question 2

Under IRC Section 1031, what happens to the taxpayer's basis in the replacement property?

Accepted Answer

It carries over from the relinquished property (substituted basis)

Answer

It is set to the fair market value of the replacement property

Answer

It is reset to zero

Answer

It is set to the replacement property's purchase price minus depreciation

Question 3

What is depreciation recapture, and how does it affect a 1031 exchange?

Accepted Answer

Depreciation recapture is deferred along with the capital gain in a successful 1031 exchange

Answer

Depreciation recapture is eliminated in a 1031 exchange

Answer

Depreciation recapture must be paid in full before the exchange can proceed

Answer

Depreciation recapture only applies to residential rental properties

Question 4

If a taxpayer continuously completes 1031 exchanges throughout their lifetime and holds the final property until death, what happens to the deferred gain?

Accepted Answer

The gain is permanently eliminated through the step-up in basis at death

Answer

The gain is taxed at the heirs' ordinary income rate

Answer

The gain must be paid within one year of death

Answer

The gain transfers to the heirs as-is with no adjustment

Question 5

Which tax rate applies to unrecaptured Section 1250 depreciation when it becomes taxable?

Accepted Answer

25%

Answer

0%

Answer

15%

Answer

37%

Question 6

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?

Accepted Answer

$0

Answer

$300,000

Answer

$150,000

Answer

$75,000