REA Real Estate Taxation & Accounting 2 — Questions and Answers
Question 1: Under MACRS, nonresidential (commercial) real property is depreciated over:
- 15 years using an accelerated method
- 27.5 years using straight-line depreciation
- 39 years using straight-line depreciation (Correct answer)
- 40 years using the double-declining balance method
Correct answer: 39 years using straight-line depreciation
Under MACRS, nonresidential real property is depreciated over 39 years using the straight-line method and the mid-month convention.
Question 2: A cost segregation study benefits a real estate investor primarily by:
- Increasing the property's appraised market value for refinancing purposes
- Reclassifying building components into shorter depreciable lives to accelerate deductions (Correct answer)
- Reducing the property's assessed value for local property tax purposes
- Establishing a higher carryover basis in replacement property for a 1031 exchange
Correct answer: Reclassifying building components into shorter depreciable lives to accelerate deductions
Cost segregation studies identify personal property and land improvement components qualifying for 5-, 7-, or 15-year depreciation instead of 27.5 or 39 years, accelerating the time value of tax deductions.
Question 3: Unrecaptured Section 1250 gain on the sale of depreciable real property is subject to a maximum federal tax rate of:
- 15%
- 20%
- 25% (Correct answer)
- 37%
Correct answer: 25%
Unrecaptured Section 1250 gain—representing previously taken straight-line depreciation on real property—is taxed at a maximum rate of 25%, which falls between regular long-term capital gains rates and ordinary income rates.
Question 4: Land is excluded from depreciation deductions primarily because:
- The IRS classifies land as a liquid current asset on the taxpayer's balance sheet
- Local zoning regulations limit changes in land use value over time
- Land does not have a determinable useful life and is assumed to last indefinitely (Correct answer)
- Depreciation of land is automatically deferred until the property is disposed of
Correct answer: Land does not have a determinable useful life and is assumed to last indefinitely
Land cannot be depreciated because it is not subject to wear, exhaustion, or obsolescence; a determinable useful life is a prerequisite for depreciation deductions under tax law.
Question 5: Under the Tax Cuts and Jobs Act of 2017, the first-year bonus depreciation percentage for qualifying property placed in service after September 27, 2017 was set at:
- 50%
- 75%
- 80%
- 100% (Correct answer)
Correct answer: 100%
The TCJA increased bonus depreciation to 100% for qualified property placed in service after September 27, 2017, before the phased reduction began in 2023.
Question 6: When computing Net Operating Income (NOI) versus taxable income, depreciation is properly treated as:
- A cash operating expense reducing both NOI and taxable income equally
- A non-cash deduction reducing taxable income but excluded from the NOI calculation (Correct answer)
- An above-the-line item added to effective gross income before expenses
- A deferred tax liability recognized only on the GAAP balance sheet
Correct answer: A non-cash deduction reducing taxable income but excluded from the NOI calculation
Depreciation is a non-cash deduction that reduces taxable income but is not subtracted when computing NOI; analysts compute NOI before depreciation and then reconcile to before-tax cash flow separately.
Question 7: Qualified Improvement Property (QIP) placed in service after December 31, 2017 has a MACRS recovery period of:
- 39 years with no bonus depreciation eligibility as interior commercial improvements
- 27.5 years, treated similarly to residential leasehold improvements
- 15 years, making it eligible for bonus depreciation after the CARES Act correction (Correct answer)
- 7 years as tangible personal property under general MACRS rules
Correct answer: 15 years, making it eligible for bonus depreciation after the CARES Act correction
The CARES Act in 2020 corrected a TCJA drafting error and assigned QIP a 15-year MACRS recovery period, qualifying it for bonus depreciation.
REA Real Estate Taxation & Accounting 2
Under MACRS, nonresidential (commercial) real property is depreciated over: