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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 361
The planning implications of the estate tax exclusion being HIGH are that:
Select an option first.
Correct answer: A — FEWER estates face estate tax — so the priority shifts from ESTATE TAX AVOIDANCE toward BASIS MAXIMISATION
Explanation: When exclusions are high, most families face NO estate tax — so the objective INVERTS: keep appreciated assets IN the estate for the STEP-UP. But note exclusions are SCHEDULED to change, and the answer depends on the LAW AT DEATH — which is unknowable. Flexible, adjustable plans (disclaimers, formula clauses) are therefore essential.
Question 362
The uncertainty of future estate tax law argues for:
Select an option first.
Correct answer: A — FLEXIBLE plans — disclaimer trusts, formula clauses and powers of appointment that ADAPT to the law in force at death
Explanation: You cannot know the exclusion, the rates, or even whether the step-up survives, at the date of a death that may be decades away. The answer is FLEXIBILITY: DISCLAIMER trusts (letting the survivor decide after the fact), FORMULA clauses (self-adjusting to the exclusion), and POWERS OF APPOINTMENT (allowing assets to be pulled into an estate for a step-up if that is then advantageous).
Question 363
A §1031 exchange: relinquished property basis $300,000, FMV $900,000. Replacement worth $750,000 plus $150,000 cash. Gain RECOGNISED is:
Select an option first.
Correct answer: A — $150,000 — the LESSER of realised gain ($600,000) or boot ($150,000)
Explanation: Realised gain = $900,000 − $300,000 = $600,000. Boot = $150,000 cash. Recognised = the LESSER = $150,000. The remaining $450,000 is DEFERRED into the replacement property's basis.
Question 364
Continuing: the basis of the REPLACEMENT property is:
Select an option first.
Correct answer: B — $300,000 — old basis $300,000 - boot received $150,000 + gain recognised $150,000
Explanation: New basis = $300,000 − $150,000 + $150,000 = $300,000. Cross-check: FMV of the new property ($750,000) − deferred gain ($450,000) = $300,000. Both routes reconcile. Note the LOW basis means LOW future depreciation — the hidden cost of the exchange.
Question 365
A taxpayer exchanges property (FMV $1,000,000, mortgage $400,000) for property worth $900,000 with a $250,000 mortgage. Total BOOT received is:
Select an option first.
Correct answer: C — $250,000 - net debt relief of $150,000 PLUS the $100,000 traded down in value
Explanation: TWO sources of boot. DEBT: relieved of $400,000, assumed $250,000 = NET debt relief of $150,000 (boot received). VALUE: traded DOWN from $1,000,000 to $900,000, so $100,000 of equity comes back as cash (also boot). TOTAL boot = $150,000 + $100,000 = $250,000. Trading DOWN in BOTH value and debt is doubly costly - to fully defer you must trade UP in both, or add cash.
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Question 366
A rental sold for $700,000; original cost $500,000; straight-line depreciation taken $180,000. Unrecaptured §1250 gain is:
Select an option first.
Correct answer: B — $180,000 — the depreciation taken, taxed at up to 25%
Explanation: Adjusted basis = $500,000 − $180,000 = $320,000. Total gain = $700,000 − $320,000 = $380,000. Of that, $180,000 (the depreciation) is UNRECAPTURED §1250 GAIN at up to 25%. The remaining $200,000 is §1231/LTCG at 15-20%.
Question 367
Continuing: the tax on the sale (25% on unrecaptured §1250; 20% on the rest; ignore NIIT) is:
Select an option first.
Correct answer: B — $85,000 — (25% x $180,000) + (20% x $200,000)
Explanation: Tax = (25% × $180,000 = $45,000) + (20% × $200,000 = $40,000) = $85,000. Note the depreciation portion is taxed at a HIGHER rate (25%) than the appreciation (20%) — sellers routinely forget this and are surprised.
Question 368
A §1031 exchange of the same property would defer tax of:
Select an option first.
Correct answer: D — $85,000 — the ENTIRE tax, including the 25% depreciation recapture
Explanation: §1031 defers the ENTIRE $85,000 — BOTH the unrecaptured §1250 gain AND the capital gain. And if the taxpayer holds the replacement property until DEATH, the step-up ERASES all of it permanently. Deferral becomes elimination.
Question 369
An installment sale: price $2,000,000; basis $800,000; buyer assumes a $500,000 mortgage. The GROSS PROFIT PERCENTAGE is:
Select an option first.
Correct answer: D — 80% — gross profit $1,200,000 over a CONTRACT PRICE of $1,500,000
Explanation: Gross profit = $2,000,000 − $800,000 = $1,200,000. CONTRACT PRICE = $2,000,000 − $500,000 mortgage assumed = $1,500,000. GP% = $1,200,000/$1,500,000 = 80%. Using the SELLING price as the denominator gives 60% — the intended trap.
Question 370
Continuing: cash of $300,000 is received in year 1. Gain recognised is:
Select an option first.
Correct answer: A — $240,000 — 80% x $300,000
Explanation: Gain = Cash received × GP% = $300,000 × 80% = $240,000. Note any DEPRECIATION RECAPTURE would be recognised IN FULL in year 1, on top of this — regardless of cash received.
Question 371
A taxpayer sells a principal residence (basis $250,000) for $1,100,000; MFJ; §121 tests met. Taxable gain is:
Select an option first.
Correct answer: D — $350,000 — the $850,000 gain less the $500,000 MFJ exclusion
Explanation: Gain = $1,100,000 − $250,000 = $850,000. §121 excludes $500,000 (MFJ). Taxable = $350,000, at LTCG rates (plus possible NIIT). Note §121 would NOT shelter any depreciation if the home had been rented.
Question 372
A donor gifts $60,000 to each of 4 children; the annual exclusion is $18,000. TAXABLE gifts are:
Select an option first.
Correct answer: C — $168,000 — $240,000 less 4 x $18,000
Explanation: Exclusions = 4 × $18,000 = $72,000. Taxable gifts = $240,000 − $72,000 = $168,000, consuming lifetime exemption. (VERIFY the current annual exclusion — it is indexed.)
Question 373
Same facts with GIFT SPLITTING by the spouse. Taxable gifts are:
Select an option first.
Correct answer: C — $96,000 — the exclusion doubles to $36,000 per donee
Explanation: GIFT SPLITTING treats each gift as half from each spouse, DOUBLING the exclusion: 4 × $36,000 = $144,000. Taxable = $240,000 − $144,000 = $96,000. Splitting requires both spouses' consent on a gift tax return.
Question 374
A decedent's gross estate is $16,000,000; debts $1,000,000; $4,000,000 to a US citizen spouse. The TAXABLE estate is:
Select an option first.
Correct answer: B — $11,000,000 — gross less debts less the unlimited marital deduction
Explanation: Taxable estate = $16,000,000 − $1,000,000 debts − $4,000,000 marital deduction = $11,000,000. The exemption is then applied against this. Note the $4m to the spouse is merely DEFERRED — it enters the survivor's estate.
Question 375
An heir inherits stock with a $2,000,000 FMV at death and a $300,000 basis to the decedent. The heir sells IMMEDIATELY for $2,000,000. The gain is:
Select an option first.
Correct answer: C — $0 — the STEP-UP sets basis at FMV, so there is essentially no gain
Explanation: §1014 steps basis UP to $2,000,000. Selling at $2,000,000 produces ZERO gain. The decedent's $1,700,000 of built-in gain is PERMANENTLY ERASED — never taxed to anyone. This single provision is why 'buy, borrow, die' works.
Question 376
The same stock GIFTED during life (basis $300,000) and sold by the donee for $2,000,000 produces a gain of:
Select an option first.
Correct answer: B — $1,700,000 — the donee takes a CARRYOVER basis; the gift transferred the built-in gain with it
Explanation: A GIFT transfers the DONOR'S BASIS. Gain = $2,000,000 − $300,000 = $1,700,000, taxed at ~23.8% ≈ $404,600. INHERITING the same stock produces ZERO tax. Identical asset, identical value — and a $400,000 difference driven purely by the transfer method.
Question 377
A taxpayer gifts property (basis $150,000; FMV $400,000) and pays $50,000 of gift tax, of which $31,250 relates to the appreciation. The donee's basis is:
Select an option first.
Correct answer: A — $181,250 — donor's basis PLUS the gift tax attributable to the APPRECIATION
Explanation: Donee's basis = donor's basis ($150,000) + gift tax attributable to the NET APPRECIATION ($31,250) = $181,250. Only the appreciation-related portion of the gift tax is added — not the whole $50,000.
Question 378
A taxpayer gifts property (basis $100,000; FMV $60,000). The donee sells for $80,000. The result is:
Select an option first.
Correct answer: B — NEITHER gain NOR loss — the sale price falls in the dual-basis 'no man's land'
Explanation: DUAL BASIS: gain basis = $100,000 (donor's); loss basis = $60,000 (FMV at gift). A sale at $80,000 falls BETWEEN them — NEITHER gain NOR loss. The $40,000 built-in loss is DESTROYED. Never gift loss property.
Question 379
A taxpayer's cost segregation study reclassifies $500,000 of a building into 5-year property. With 100% bonus depreciation and a 37% rate, the year-1 tax saving is:
Select an option first.
Correct answer: C — $185,000 — $500,000 x 37%
Explanation: Year-1 saving = $500,000 × 37% = $185,000 (versus roughly $12,800 under 39-year straight-line). The trade-off: this $500,000 will face FULL §1245 ORDINARY recapture on sale — unless the taxpayer HOLDS UNTIL DEATH, when the step-up erases it entirely.
Question 380
A §1202 QSBS exclusion of $10,000,000 of gain at a 23.8% rate saves:
Select an option first.
Correct answer: B — $2,380,000
Explanation: Tax saved = $10,000,000 × 23.8% (20% LTCG + 3.8% NIIT) = $2,380,000. This is why the entity choice must be made at FORMATION — the 5-year clock and the C corporation requirement cannot be satisfied retroactively.
Question 381
A rental (basis $200,000 after $300,000 of depreciation; original cost $500,000) is sold for $900,000. The ORDINARY/25% component versus the LTCG component is:
Select an option first.
Correct answer: B — $300,000 of UNRECAPTURED §1250 GAIN at 25%, and $400,000 of LTCG at 20%
Explanation: Total gain = $900,000 − $200,000 = $700,000. UNRECAPTURED §1250 = the $300,000 of straight-line depreciation, at up to 25%. The REMAINING $400,000 is §1231/LTCG at 20%. Tax = $75,000 + $80,000 = $155,000. A §1031 exchange defers ALL of it; death ERASES all of it.
Question 382
The same property is held until DEATH instead. The heirs' basis is $900,000 and they sell immediately. The total tax on the $700,000 of gain is:
Select an option first.
Correct answer: B — $0 — the STEP-UP erases the ENTIRE gain, INCLUDING the depreciation recapture
Explanation: The §1014 STEP-UP sets basis at $900,000 — erasing BOTH the $400,000 of appreciation AND the $300,000 of depreciation recapture. The heirs sell at $900,000 with ZERO gain. $155,000 of tax simply vanishes. This is why 'never sell, just die' is not a joke.
Question 383
A taxpayer with a $2m estate (well below the exclusion) holds stock with a $1.8m built-in gain. They should:
Select an option first.
Correct answer: A — HOLD IT UNTIL DEATH — no estate tax will be due, and the STEP-UP erases the $1.8m gain entirely
Explanation: With NO estate tax exposure, gifting the stock TRANSFERS THE LOW BASIS and FORFEITS the step-up — costing the family ~$428,000 (23.8% × $1.8m) for NO benefit. Simply HOLDING erases the gain. Aggressive gifting, sensible when estate tax loomed, actively DESTROYS value for a below-exclusion family.
Question 384
A taxpayer with a $40m estate holds the same $1.8m-gain stock. Now they should consider:
Select an option first.
Correct answer: A — GIFTING or an IDGT — the 40% ESTATE tax exceeds the 23.8% capital gains cost of forfeiting the step-up
Explanation: THE ARITHMETIC FLIPS. Estate tax at 40% ($720,000 on $1.8m of value) EXCEEDS the capital gains cost of forfeiting the step-up (23.8% × $1.8m = $428,000). Removing the asset from the estate WINS. The right answer depends entirely on WHETHER THE ESTATE IS TAXABLE — and the same facts give opposite advice.
Question 385
An IDGT removes $5m from a $30m estate. The estate tax saving (40%) is $2m. The cost is:
Select an option first.
Correct answer: C — The FORFEITED STEP-UP — the heirs inherit the LOW basis and owe capital gains tax on the built-in gain
Explanation: The IDGT SAVES $2m of ESTATE tax (40% × $5m) but the assets are OUTSIDE the estate and get NO STEP-UP. The heirs inherit the LOW basis and a built-in capital gains liability. If the built-in gain were $4m, the cost is 23.8% × $4m = $952,000. Net benefit = $2m − $952,000 = ~$1m. Still worth it — but not the free lunch it appears.
Question 386
A taxpayer exchanges under §1031, deferring $600,000 of gain, then dies holding the property. The tax on the deferred gain is:
Select an option first.
Correct answer: A — $0 — the STEP-UP at death ERASES the entire deferred gain
Explanation: §1031 DEFERS; §1014 ERASES. The $600,000 of accumulated deferred gain — potentially decades' worth across multiple exchanges — is PERMANENTLY ELIMINATED at death. The heirs take a stepped-up basis and owe nothing. Deferral has become exclusion.
Question 387
A taxpayer with a $600,000 deferred §1031 gain needs $400,000 of cash. Selling would trigger the gain. Instead they should:
Select an option first.
Correct answer: D — REFINANCE — borrowing against the property is NOT a taxable event, and the deferred gain remains deferred (and will be erased at death)
Explanation: BORROWING IS NOT A TAXABLE EVENT. A CASH-OUT REFINANCE extracts $400,000 tax-free while the deferred gain remains intact — to be erased at death. This is the 'BORROW' step of 'BUY, BORROW, DIE', and it is how large fortunes fund consumption without ever realising gain.
Question 388
A cost segregation study accelerates $600,000 of deductions. The taxpayer plans to SELL in 5 years. The recapture cost is:
Select an option first.
Correct answer: D — FULL §1245 ORDINARY recapture on the $600,000 — so the benefit is TIMING only, and the recapture rate (up to 37%) EXCEEDS the 25% §1250 rate that would have applied
Explanation: Cost segregation CONVERTS 39-year real property (25% §1250 recapture) into 5/7/15-year personal property (FULL §1245 ORDINARY recapture at up to 37%). If you SELL, you accelerate the deduction but face a HARSHER recapture. It usually still wins on time value — but it is a trade, and the rate goes the WRONG way.
Question 389
The same cost segregation, but the taxpayer HOLDS UNTIL DEATH. The recapture cost is:
Select an option first.
Correct answer: C — ZERO — the STEP-UP erases the recapture entirely, converting a TIMING benefit into a PERMANENT one
Explanation: THE KILLER COMBINATION. Cost segregation accelerates $600,000 of deductions NOW (worth ~$222,000 at 37%). The recapture that would arise on SALE is ERASED by the step-up at DEATH. You get the deductions and NEVER pay the recapture. A timing benefit becomes a permanent one.
Question 390
A C corporation sells its assets for a $5m gain, then liquidates. The combined tax (21% corporate; 23.8% shareholder) is approximately:
Select an option first.
Correct answer: B — About $1,990,000 — 21% corporate ($1.05m), then 23.8% on the $3.95m distributed
Explanation: Corporate tax = 21% × $5m = $1,050,000, leaving $3,950,000. Shareholder tax on liquidation = 23.8% × $3,950,000 = $940,100. TOTAL ≈ $1,990,000 — an effective 39.8%. This is why C corporation sellers fight for a STOCK sale (one layer, ~23.8%).
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