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Free Questions › CPA › Tax Compliance and Planning
Free CPA Tax Compliance and Planning Practice Questions & Answers
400 exam-style Tax Compliance and Planning questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 271
UNRECAPTURED §1250 GAIN is taxed at a maximum of:
Select an option first.
Correct answer: C — 25%
Explanation: UNRECAPTURED §1250 GAIN — the straight-line depreciation taken on real property — is taxed at a MAXIMUM of 25%. It is NOT ordinary income, but it does NOT get the 15/20% LTCG rate either. It sits in between, and it is the depreciation 'clawback' that surprises real estate sellers.
Question 272
Net §1231 GAINS are treated as:
Select an option first.
Correct answer: D — LONG-TERM CAPITAL GAIN — while net §1231 LOSSES are ORDINARY
Explanation: §1231 gives the BEST OF BOTH: net GAINS get preferential LTCG rates; net LOSSES are ORDINARY (fully deductible, no $3,000 cap). The §1231 LOOKBACK limits the benefit by recharacterising gains as ordinary to the extent of net §1231 losses in the prior 5 years.
Question 273
The §1231 LOOKBACK rule recharacterises current gains as ordinary to the extent of:
Select an option first.
Correct answer: C — Net §1231 LOSSES deducted in the PRIOR 5 YEARS
Explanation: The LOOKBACK prevents taxpayers from taking ORDINARY losses one year and CAPITAL gains the next. Current-year net §1231 GAIN is ORDINARY to the extent of unrecaptured net §1231 LOSSES from the prior FIVE years. Congress noticed the arbitrage.
Question 274
An INSTALLMENT SALE defers gain, but DEPRECIATION RECAPTURE is:
Select an option first.
Correct answer: A — Recognised IN FULL in the YEAR OF SALE — even if no cash is received
Explanation: §1245/§1250 RECAPTURE is recognised ENTIRELY in the YEAR OF SALE, regardless of how little cash is received. The instalment method defers only the CAPITAL gain. This can produce a tax bill with NO CASH to pay it — the most dangerous trap in instalment sales.
Question 275
The instalment sale GROSS PROFIT PERCENTAGE is:
Select an option first.
Correct answer: B — GROSS PROFIT / CONTRACT PRICE (selling price less qualifying debt assumed)
Explanation: GP% = Gross Profit / CONTRACT PRICE, where CONTRACT PRICE = selling price MINUS qualifying debt assumed by the buyer. Gain recognised each year = cash received (excluding interest) × GP%. Using the SELLING price as the denominator is the classic error.
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Question 276
An OPPORTUNITY ZONE investment allows a taxpayer to:
Select an option first.
Correct answer: B — DEFER a capital gain by reinvesting it in a Qualified Opportunity Fund — and EXCLUDE the QOF's OWN appreciation if held 10+ years
Explanation: OPPORTUNITY ZONES offer TWO benefits: (1) DEFERRAL of the original gain reinvested within 180 days; and (2) if the QOF investment is held TEN YEARS OR MORE, the QOF'S OWN APPRECIATION is EXCLUDED ENTIRELY. The second benefit is the powerful one — verify the current rules, which have changed.
Question 277
The §121 principal residence exclusion is:
Select an option first.
Correct answer: A — $250,000 of GAIN ($500,000 MFJ)
Explanation: §121 excludes up to $250,000 of GAIN ($500,000 MFJ) on the sale of a PRINCIPAL RESIDENCE. Requirements: OWNED and USED as a principal residence for 2 OF THE LAST 5 YEARS, and no §121 exclusion claimed in the prior 2 years. It can be used REPEATEDLY, every two years.
Question 278
§121 may be used:
Select an option first.
Correct answer: B — REPEATEDLY — as often as every TWO YEARS
Explanation: §121 is NOT a once-in-a-lifetime benefit. It may be claimed as often as every TWO YEARS, provided the ownership and use tests are met each time. Serial home-improvers have used this deliberately.
Question 279
§121 does NOT shelter:
Select an option first.
Correct answer: B — DEPRECIATION RECAPTURE (unrecaptured §1250 gain) on any period of rental use
Explanation: §121 NEVER shelters DEPRECIATION taken after May 1997 — that is always recaptured as unrecaptured §1250 gain at up to 25%. Nor does it shelter gain allocable to periods of NON-QUALIFIED (non-principal-residence) use. Converting a rental to a residence does not wipe the slate clean.
Question 280
A §1033 INVOLUNTARY CONVERSION permits deferral if proceeds are reinvested within:
Select an option first.
Correct answer: D — Generally 2 YEARS (3 for condemnation of business/investment REAL property)
Explanation: §1033 allows deferral where property is destroyed, stolen or condemned and the proceeds are REINVESTED in qualifying replacement property — generally within 2 YEARS (3 for condemned real property). Gain is recognised to the extent proceeds are NOT reinvested.
Question 281
A RELATED PARTY loss under §267 is:
Select an option first.
Correct answer: B — DISALLOWED — though the related buyer may use it to reduce a later gain on resale
Explanation: §267 DISALLOWS losses on sales between related parties (family, an individual and a controlled corporation). The loss is not entirely lost: the RELATED BUYER may use it to REDUCE a subsequent GAIN on resale to an unrelated party — but it can never create or increase a loss.
Question 282
A §1031 exchange between RELATED parties requires both to hold the property for:
Select an option first.
Correct answer: A — 2 YEARS — an earlier disposition by EITHER party triggers the deferred gain
Explanation: §1031(f): in a related-party exchange, if EITHER party disposes of the property within TWO YEARS, the DEFERRED GAIN is triggered for BOTH. The rule prevents related parties from using an exchange to shift basis and then cash out.
Question 283
A CHARITABLE REMAINDER TRUST allows a donor to:
Select an option first.
Correct answer: D — Contribute APPRECIATED property, avoid immediate gain, receive an INCOME STREAM, and take a partial charitable deduction
Explanation: A CRT: contribute appreciated property; the trust SELLS it TAX-FREE (no immediate gain); the donor receives an INCOME STREAM for life or a term; the REMAINDER passes to charity; and the donor takes a PARTIAL charitable deduction now. It converts a concentrated, low-basis position into diversified income without an immediate tax hit.
Question 284
An INSTALLMENT SALE to an INTENTIONALLY DEFECTIVE GRANTOR TRUST (IDGT) works because:
Select an option first.
Correct answer: B — The trust is DISREGARDED for INCOME tax (so the sale triggers NO gain) but is RESPECTED for ESTATE tax (removing future appreciation from the estate)
Explanation: The IDGT exploits the mismatch between the INCOME tax and ESTATE tax grantor trust rules. The sale to the trust is IGNORED for income tax (no gain — you cannot sell to yourself), but the assets are OUT of the estate for estate tax. Future appreciation escapes estate tax entirely, and the grantor's payment of the trust's income tax is a further tax-free gift.
Question 285
A GRANTOR RETAINED ANNUITY TRUST (GRAT) transfers:
Select an option first.
Correct answer: A — The APPRECIATION ABOVE a defined hurdle rate — with little or no gift tax cost
Explanation: A GRAT: the grantor contributes an asset and retains an ANNUITY for a term. If the asset appreciates FASTER than the IRS hurdle rate, the EXCESS passes to beneficiaries GIFT-TAX FREE. A 'zeroed-out' GRAT is structured so the gift value is near zero — heads you win, tails you break even.
Question 286
The federal GIFT TAX ANNUAL EXCLUSION applies:
Select an option first.
Correct answer: C — PER DONEE, PER YEAR — to any number of donees
Explanation: The annual exclusion applies PER DONEE, PER YEAR, to ANY NUMBER of donees, and does NOT consume lifetime exemption. GIFT SPLITTING by a married couple DOUBLES it. Systematic annual gifting to children and grandchildren removes substantial value from an estate over time.
Question 287
The MARITAL DEDUCTION for a US citizen spouse is:
Select an option first.
Correct answer: B — UNLIMITED — but it DEFERS rather than eliminates the tax, since the property enters the survivor's estate
Explanation: The MARITAL DEDUCTION is UNLIMITED for a US CITIZEN spouse — but it merely DEFERS the tax to the survivor's death. Relying on it entirely can WASTE the first spouse's exemption, which is why PORTABILITY (electing to carry over the unused exclusion) must be claimed on a TIMELY estate tax return.
Question 288
A COST SEGREGATION study is used to:
Select an option first.
Correct answer: A — RECLASSIFY components of a building into SHORTER-LIVED asset classes, ACCELERATING depreciation
Explanation: A COST SEGREGATION study identifies building components (fixtures, carpeting, land improvements, specialised electrical) that qualify as 5-, 7- or 15-YEAR property rather than 39-year real property. Accelerating those deductions creates substantial early-year tax savings — and with bonus depreciation, potentially immediate ones.
Question 289
The downside of cost segregation is:
Select an option first.
Correct answer: A — GREATER §1245 RECAPTURE at sale — the accelerated depreciation on personal property comes back as ORDINARY income
Explanation: Cost segregation converts 39-year REAL property (subject to 25% unrecaptured §1250) into 5/7/15-year PERSONAL property (subject to FULL §1245 ORDINARY recapture). You accelerate the deduction now but face a HARSHER recapture later. It still usually wins on time value — but it is a trade, not a free lunch.
Question 290
A taxpayer planning to hold property until DEATH should view cost segregation as:
Select an option first.
Correct answer: C — HIGHLY ATTRACTIVE — the accelerated deductions are taken, and the step-up at death ERASES the recapture entirely
Explanation: This is the killer combination. Cost segregation accelerates deductions NOW; the recapture liability that would arise on SALE is ERASED by the §1014 STEP-UP at DEATH. You get the deductions and never pay the recapture. Hold-until-death transforms a timing benefit into a permanent one.
Question 291
A §1031 exchange followed by a cost segregation study on the replacement property:
Select an option first.
Correct answer: A — Is permitted — deferring the gain AND accelerating depreciation on the new property
Explanation: The strategies STACK: §1031 DEFERS the gain on the relinquished property, and a COST SEGREGATION study on the REPLACEMENT property ACCELERATES depreciation on the new basis. Layering compatible provisions is what distinguishes planning from compliance.
Question 292
A REVERSE §1031 exchange involves:
Select an option first.
Correct answer: C — ACQUIRING the replacement property BEFORE selling the relinquished property (via an exchange accommodation titleholder)
Explanation: A REVERSE EXCHANGE: the replacement property is acquired FIRST — parked with an EXCHANGE ACCOMMODATION TITLEHOLDER — and the relinquished property is sold within 180 days. It is used in competitive markets where the replacement property cannot wait. It is more complex and more expensive, but the deadlines still apply.
Question 293
A BUILD-TO-SUIT (improvement) exchange allows:
Select an option first.
Correct answer: B — The replacement property to be IMPROVED using exchange proceeds — but improvements must be completed within the 180-day window
Explanation: An IMPROVEMENT exchange lets the taxpayer use exchange proceeds to BUILD or IMPROVE the replacement property. The catch: only improvements COMPLETED WITHIN THE 180-DAY window count toward the exchange value. Construction schedules and tax deadlines rarely align comfortably.
Question 294
A DELAWARE STATUTORY TRUST (DST) interest qualifies as:
Select an option first.
Correct answer: B — REAL PROPERTY for §1031 purposes — allowing a small investor to complete an exchange into fractional institutional real estate
Explanation: A DST interest is treated as REAL PROPERTY for §1031, letting a taxpayer exchange into FRACTIONAL institutional-grade real estate without managing it. It solves a real problem: finding a suitable like-kind replacement within 45 days. The trade-off is illiquidity and no control.
Question 295
An OPPORTUNITY ZONE investment must be made within:
Select an option first.
Correct answer: A — 180 DAYS of realising the gain
Explanation: The gain must be reinvested in a QUALIFIED OPPORTUNITY FUND within 180 DAYS of realisation. Unlike §1031, the taxpayer reinvests only the GAIN (not the whole proceeds) — and unlike §1031, there is no like-kind requirement and no qualified intermediary. VERIFY the current rules; this regime has changed.
Question 296
Opportunity Zones differ from §1031 in that OZ requires reinvestment of:
Select an option first.
Correct answer: A — ONLY THE GAIN — the taxpayer keeps the return of basis
Explanation: §1031 requires reinvesting the ENTIRE PROCEEDS to fully defer. An OPPORTUNITY ZONE requires reinvesting only the GAIN — the basis portion comes back to the taxpayer TAX-FREE and can be used for anything. That is a genuine cash-flow advantage of the OZ route.
Question 297
The 10-year Opportunity Zone benefit is:
Select an option first.
Correct answer: D — EXCLUSION of the QOF investment's OWN appreciation — the basis steps up to FMV on sale
Explanation: The powerful benefit: hold the QOF investment for TEN YEARS OR MORE and its OWN APPRECIATION is EXCLUDED ENTIRELY (via a basis step-up to FMV on sale). The original deferred gain is still eventually taxed — but everything the QOF earns thereafter can be tax-free.
Question 298
A CHARITABLE REMAINDER UNITRUST (CRUT) pays the beneficiary:
Select an option first.
Correct answer: C — A FIXED PERCENTAGE of the trust's assets, REVALUED ANNUALLY — so payments rise with the portfolio
Explanation: A CRUT pays a fixed PERCENTAGE of assets revalued ANNUALLY — payments grow if the portfolio grows, providing inflation protection. A CRAT pays a FIXED DOLLAR amount, which is more predictable but erodes in real terms. Additional contributions are permitted to a CRUT but not a CRAT.
Question 299
A CHARITABLE LEAD TRUST (CLT) is the inverse of a CRT because it:
Select an option first.
Correct answer: D — Pays the CHARITY FIRST for a term, with the REMAINDER passing to family — transferring appreciation at a low gift-tax cost
Explanation: A CLT pays the CHARITY FIRST for a term, with the REMAINDER passing to FAMILY. In a LOW interest rate environment the remainder's actuarial value is small, so the gift tax cost is low — and any appreciation above the hurdle passes to heirs tax-free. It is the mirror image of a CRT.
Question 300
A GRAT works best when:
Select an option first.
Correct answer: D — The asset APPRECIATES FASTER than the IRS hurdle rate — and interest rates are LOW
Explanation: A GRAT succeeds when the asset OUTPERFORMS the §7520 hurdle rate. A LOW hurdle rate makes success easier. A 'zeroed-out' GRAT has almost no gift tax cost — so if the asset underperforms, you simply get the asset back and have lost only the professional fees. Heads you win, tails you break even.
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