Chapter 4 of 410–20% of exam

Area IV: Property Transactions (Disposition of Assets)

This area is about what happens when an asset leaves the taxpayer's hands. Candidates decide whether gain is recognized, compute realized, recognized and deferred gain and the new basis, assign character through §1231 and depreciation recapture, and apply the related-party rules. Review-style questions ask a candidate to correct a schedule or a diagnostic from software.

Nontaxable dispositions

Like-kind exchanges now cover only real property held for business or investment. Gain is recognized to the extent of boot, and relief from a liability counts as boot. Involuntary conversions defer gain when the proceeds are reinvested in qualifying property within the replacement period. The home sale exclusion removes gain up to a cap for a principal residence.

Like-kind real property

Only real property held for productive use in a business or for investment qualifies. U.S. and foreign real property are not like kind.

IRC §1031(a)(1), (h)

Deferred exchange deadlines

Replacement property must be identified within 45 days and received by the earlier of 180 days or the return due date, including extensions.

IRC §1031(a)(3)

Involuntary conversion replacement period

Generally two years after the close of the first year in which gain is realized. It is three years for condemned real property held for business or investment.

IRC §1033(a)(2)(B), (g)(4)

Principal residence exclusion

Up to $250,000 of gain, or $500,000 on a qualifying joint return, is excluded if the home was owned and used as a principal residence for two of the five years before the sale.

IRC §121(a)-(b)

Character: §1231, recapture and small business stock

Depreciable property and real property used in a business and held more than a year are §1231 assets. A net §1231 gain is long-term capital gain, except to the extent of §1231 losses in the prior five years, and a net §1231 loss is ordinary. Depreciation recapture turns part of the gain into ordinary income first. Losses on qualifying small business stock can be ordinary up to an annual cap.

Five-year lookback

A net §1231 gain is ordinary income to the extent of non-recaptured net §1231 losses from the five preceding years.

IRC §1231(c)

Section 1245 recapture

Gain on depreciable personal property is ordinary income up to the depreciation taken.

IRC §1245(a)(1)

Unrecaptured §1250 gain

For individuals, gain on depreciable real property attributable to depreciation is taxed at a maximum 25% rate. Corporations instead treat 20% of the recapture difference as ordinary income under §291.

IRC §1(h)(6); §291(a)(1)

Section 1244 stock

An individual who acquired the stock at original issue may treat up to $50,000 of loss, or $100,000 on a joint return, as ordinary each year.

IRC §1244(a)-(b)

Installment sales and related parties

The installment method spreads gain over the years in which payments are received, but depreciation recapture is recognized in full in the year of sale. Related-party rules disallow losses, turn gain on depreciable property into ordinary income, and count stock owned by family members and entities as owned by the taxpayer.

Gross profit ratio

Each payment is gain in the ratio of gross profit to total contract price.

IRC §453(c)

Recapture in the year of sale

Recapture income is recognized when the sale occurs, and only the remaining gain is reported on the installment method.

IRC §453(i)

Related-party losses

Losses on sales between related persons are disallowed. A related buyer who later sells at a gain recognizes it only to the extent it exceeds the disallowed loss.

IRC §267(a)(1), (d)

Family attribution

An individual is treated as owning stock owned by siblings, spouse, ancestors and lineal descendants. In-laws are not included.

IRC §267(c)(2), (c)(4)

Depreciable property sold to a controlled entity

Gain is ordinary income when the property is depreciable in the related buyer's hands.

IRC §1239(a)

Keep going: the full CPA Exam — Tax Compliance and Planning (TCP) guide covers every section of the exam. CPA TCP Study Guide — 2026 Edition — PDF + EPUB, $19.99 · 14-day refund →

Practice this topic →← All chapters

Studying in order?

Practice stays free. The full CPA Exam — Tax Compliance and Planning (TCP) study guide is the material itself, taught start to finish — a downloadable PDF + EPUB you keep.

Get the book — $19.99