Free CPA TCP (Tax Compliance & Planning) Property Transactions Practice Questions

C is correct. Under MACRS (IRC Section 168), nonresidential real property is depreciated over 39 years using the straight-line method with the mid-month convention. This applies to commercial buildings such as office buildings, warehouses, retail stores, and factories. Residential rental property has a different recovery period of 27.5 years. The TCJA did not shorten the recovery period for real property (though it did provide 100% bonus depreciation for certain qualified improvement property). Seven-year property is a different MACRS class that applies to office furniture, equipment, and certain other personal property, not real property.

B is correct. Qualified improvement property (QIP) was assigned a 15-year recovery period by the CARES Act, correcting the TCJA drafting error that had inadvertently given QIP a 39-year life. QIP uses the straight-line method (as it is real property) with a half-year convention. QIP is also eligible for bonus depreciation. Under the TCJA phase-down schedule, bonus depreciation is 100% for property placed in service through September 27, 2017-2022, then phases down: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027. For 2025, the bonus depreciation rate is 40%, so 200,000 is immediately deducted (40% of 500,000) and the remaining 300,000 is depreciated straight-line over 15 years. QIP is not depreciated over 39 years (that was the pre-CARES Act treatment). The 100% bonus expired after 2022. QIP is not 7-year property.

C is correct. Adjusted basis = \$240,000 \minus \$160,000 = \$80,000. Total gain = \$275,000 \minus \$80,000 = \$195,000. Under Section 1245, gain is recaptured as ordinary income to the extent of accumulated depreciation. Ordinary income recapture = lesser of depreciation (\$160,000) or total gain (\$195,000) = \$160,000. The remaining gain of \$195,000 \minus \$160,000 = \$35,000 is treated as Section 1231 gain, which is taxed at long-term capital gains rates if net Section 1231 gains exceed losses for the year.
Choice A is incorrect because \$195,000 ordinary income treats the entire gain as recapture, but Section 1245 recapture is limited to the depreciation taken (\$160,000).
Choice B is incorrect because it reverses the ordinary and capital amounts; the depreciation recapture portion (\$160,000) is ordinary, not the residual.
Choice D is incorrect because it classifies all gain as Section 1231 and ignores the mandatory depreciation recapture under Section 1245.