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Free CPA Taxation and Regulation Practice Questions & Answers
500 exam-style Taxation and Regulation questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 481
A taxpayer gifts property (donor's basis $80,000; FMV $200,000) and pays $24,000 of gift tax, of which the portion attributable to appreciation is $14,400. The donee's basis is:
Select an option first.
Correct answer: A — $94,400 — the donor's basis PLUS the gift tax attributable to the APPRECIATION
Explanation: When FMV EXCEEDS the donor's basis, the donee takes a CARRYOVER basis INCREASED by the gift tax attributable to the NET APPRECIATION: $80,000 + $14,400 = $94,400. Only the appreciation-related portion of the gift tax is added — not the whole $24,000 (option C).
Question 482
A taxpayer has a $60,000 passive loss from Activity A, $20,000 of passive income from Activity B, and $50,000 of wages. They then FULLY DISPOSE of Activity A in a taxable sale to an unrelated party. The deductible loss is:
Select an option first.
Correct answer: A — $60,000 — a FULLY TAXABLE DISPOSITION of the ENTIRE interest RELEASES all suspended losses, deductible against ANY income including wages
Explanation: On a COMPLETE, FULLY TAXABLE DISPOSITION of the ENTIRE interest to an UNRELATED party, ALL suspended passive losses are RELEASED and become deductible against ANY income — including ACTIVE wages. The passive character disappears entirely on disposition. Timing that sale is genuine planning.
Question 483
A taxpayer converts a rental property to a personal residence, then sells it 3 years later. Gain attributable to the period of NON-QUALIFIED (rental) use is:
Select an option first.
Correct answer: D — NOT excludable — gain allocable to periods of NON-QUALIFIED USE is taxable, and depreciation recapture is ALWAYS taxable
Explanation: §121 does NOT shelter gain allocable to periods of NON-QUALIFIED USE (generally, non-principal-residence use after 2008). That portion is prorated and TAXABLE. Separately, ALL depreciation taken after May 1997 is ALWAYS recaptured as unrecaptured §1250 gain at 25% — §121 never shelters depreciation recapture.
Question 484
A taxpayer exchanges real property (basis $200,000, subject to a $150,000 mortgage assumed by the other party) for like-kind property worth $300,000, subject to a $100,000 mortgage the taxpayer assumes. Net boot received is:
Select an option first.
Correct answer: B — $50,000 — debt relief of $150,000 LESS debt assumed of $100,000
Explanation: Debt RELIEF ($150,000) is boot RECEIVED; debt ASSUMED ($100,000) is boot GIVEN. They are NETTED: $150,000 − $100,000 = $50,000 NET boot received. Only NET relief triggers gain, and only up to the realised gain.
Question 485
A taxpayer has $500,000 of QBI from an SSTB and taxable income of $600,000 (well above the upper threshold). The QBI deduction is:
Select an option first.
Correct answer: D — ZERO — an SSTB is FULLY PHASED OUT above the upper threshold
Explanation: An SSTB (law, health, accounting, consulting, financial services, brokerage) loses the QBI deduction ENTIRELY above the upper threshold. A NON-SSTB, by contrast, would merely be subject to the W-2/UBIA cap — it would still get SOMETHING. That total-loss-versus-capped distinction is the whole SSTB point.
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Question 486
A taxpayer's ISO stock: exercised at $10 when FMV was $50; sold 6 months after exercise for $70. The disposition is:
Select an option first.
Correct answer: A — DISQUALIFYING — the 1-year-from-exercise test fails, so the $40 bargain element becomes ORDINARY income
Explanation: A QUALIFYING ISO disposition requires holding BOTH: 2 years from GRANT and 1 year from EXERCISE. Selling 6 months after exercise FAILS the second test. The result: the $40 BARGAIN ELEMENT (per share) becomes ORDINARY compensation income, and the remaining $20 is capital gain. The employer then gets a DEDUCTION — which it would NOT have had on a qualifying disposition.
Question 487
A taxpayer sells property on the instalment method for $1,000,000 (basis $400,000), receiving $200,000 down. Of the total gain, $150,000 is §1245 depreciation recapture. Gain recognised in Year 1 is:
Select an option first.
Correct answer: D — $240,000 — the $150,000 recapture is recognised IN FULL immediately, PLUS instalment gain on the down payment
Explanation: STEP 1: §1245 RECAPTURE of $150,000 is recognised IN FULL in the year of sale, regardless of cash received. STEP 2: the recapture INCREASES basis for instalment purposes to $400,000 + $150,000 = $550,000. STEP 3: remaining gross profit = $1,000,000 - $550,000 = $450,000, so GP% = 45%. STEP 4: instalment gain on the $200,000 down payment = 45% x $200,000 = $90,000. TOTAL Year 1 gain = $150,000 + $90,000 = $240,000. Recapture accelerates in full — which can produce tax with no cash to pay it.
Question 488
A married couple, both age 68, sell their home of 30 years for $1,400,000 (basis $200,000). One spouse dies before the sale but they qualify for §121. The excludable gain is:
Select an option first.
Correct answer: A — $500,000 (if sold within 2 years of the death, the survivor may use the MFJ exclusion)
Explanation: A SURVIVING SPOUSE may use the $500,000 MFJ exclusion if the sale occurs within TWO YEARS of the spouse's death and the couple met the §121 requirements immediately before. Gain = $1,200,000; excludable $500,000; taxable $700,000. (Note a step-up in basis on the deceased spouse's half would also reduce the gain — a second concept the facts invite.)
Question 489
A cash-basis taxpayer receives a $50,000 payment in December Year 1 for services to be performed in Year 2. The income is taxable in:
Select an option first.
Correct answer: C — YEAR 1 — a CASH-basis taxpayer is taxed on RECEIPT, regardless of when the services are performed
Explanation: A CASH-basis taxpayer is taxed on RECEIPT — the CLAIM OF RIGHT doctrine. Prepaid income is taxable when received, even though not yet earned. (An ACCRUAL-basis taxpayer has a limited one-year deferral for advance payments for SERVICES.) The taxpayer's method drives the answer.
Question 490
A taxpayer has AGI of $200,000, medical expenses of $18,000, SALT of $30,000 (cap $10,000), mortgage interest of $12,000, and charitable cash of $5,000. Total itemised deductions are:
Select an option first.
Correct answer: B — $30,000 — medical ($18,000 − 7.5% × $200,000 = $3,000) + SALT capped at $10,000 + mortgage $12,000 + charity $5,000
Explanation: Medical: $18,000 − (7.5% × $200,000 = $15,000) = $3,000. SALT: capped at $10,000 (of the $30,000 paid). Mortgage: $12,000. Charity: $5,000. TOTAL = $3,000 + $10,000 + $12,000 + $5,000 = $30,000. Two limitations chain here — the medical floor AND the SALT cap.
Question 491
A taxpayer sells stock at a $10,000 loss on 1 December and their SPOUSE buys substantially identical stock on 15 December. The loss is:
Select an option first.
Correct answer: C — DISALLOWED as a wash sale — a purchase by a SPOUSE (or a controlled entity) triggers the rule
Explanation: The WASH SALE rule looks through to related acquisitions. A purchase by the taxpayer's SPOUSE, or by a corporation or IRA they control, within the 61-day window TRIGGERS the rule. The $10,000 loss is DISALLOWED and added to the basis of the replacement shares. Buying in an IRA is even worse — the basis addition is lost entirely.
Question 492
A taxpayer's home is destroyed in a federally declared disaster. Basis $250,000; FMV before $400,000; FMV after $0; insurance proceeds $380,000. AGI is $100,000. The result is:
Select an option first.
Correct answer: B — A $130,000 GAIN — insurance proceeds ($380,000) EXCEED basis ($250,000), so there is a casualty GAIN, not a loss
Explanation: When insurance proceeds EXCEED basis, the result is a casualty GAIN, not a loss: $380,000 − $250,000 = $130,000. (The taxpayer may DEFER it under §1033 by reinvesting in replacement property, and §121 may also shelter part of it for a principal residence.) Reflexively computing a loss is the trap.
Question 493
A taxpayer with $50,000 of wages has a $30,000 loss from an S corporation in which they MATERIALLY PARTICIPATE, with sufficient basis and at-risk amount. The deductible loss is:
Select an option first.
Correct answer: C — $30,000 — MATERIAL PARTICIPATION makes it NON-PASSIVE, so it offsets wages
Explanation: With sufficient BASIS and AT-RISK amount, and MATERIAL PARTICIPATION (making it NON-PASSIVE), the loss clears all three hurdles and is FULLY deductible against ordinary income — including wages. Material participation is what unlocks the loss; without it, the $30,000 would be suspended.
Question 494
A taxpayer has a $40,000 §1231 gain and a $25,000 §1231 loss this year, and deducted $18,000 of net §1231 losses in the prior 3 years. The character of the net result is:
Select an option first.
Correct answer: C — $15,000 net §1231 gain, of which $15,000 is ORDINARY under the LOOKBACK (capped at the $18,000 of prior losses)
Explanation: Step 1: net the §1231 items: $40,000 − $25,000 = $15,000 NET §1231 GAIN. Step 2: apply the LOOKBACK — recharacterise as ORDINARY to the extent of unrecaptured net §1231 LOSSES in the prior 5 years ($18,000). Since $15,000 < $18,000, the ENTIRE $15,000 is ORDINARY. $3,000 of the lookback remains available against future gains.
Question 495
A taxpayer sells a business asset used in a trade or business, held 8 months, at a $30,000 gain. The character is:
Select an option first.
Correct answer: B — ORDINARY income — §1231 requires a holding period of MORE THAN ONE YEAR
Explanation: §1231 treatment (net gains → LTCG) requires the property to be held MORE THAN ONE YEAR. Held only 8 months, the asset is NOT §1231 property, and the gain is ORDINARY. The holding period gate is easy to overlook when the fact pattern emphasises 'business use'.
Question 496
A taxpayer contributes appreciated stock (basis $10,000; FMV $50,000) held 8 MONTHS to a public charity. The deduction is:
Select an option first.
Correct answer: C — $10,000 — SHORT-TERM capital gain property is ORDINARY INCOME property, deductible at the LESSER of basis or FMV
Explanation: Held only 8 MONTHS, the stock is SHORT-TERM capital gain property — which is treated as ORDINARY INCOME property for charitable purposes, deductible only at the LESSER OF BASIS OR FMV = $10,000. Holding it four more months would make it LONG-TERM, unlocking a $50,000 FMV deduction. Four months is worth $40,000 of deduction.
Question 497
A taxpayer's rental property generates a $40,000 loss. They are a REAL ESTATE PROFESSIONAL and materially participate. Their other income is $200,000 of wages. The deductible loss is:
Select an option first.
Correct answer: B — $40,000 — real estate professional status makes the rental NON-PASSIVE, so it offsets wages in full
Explanation: A REAL ESTATE PROFESSIONAL (over 750 hours AND more than half of all personal services in real property trades) who MATERIALLY PARTICIPATES in the rental makes it NON-PASSIVE. The loss then offsets ANY income, including wages — with no $25,000 cap and no AGI phase-out. This is the single most valuable status in the passive loss rules.
Question 498
A taxpayer sells §1231 property at a $50,000 gain and, in the SAME year, has a §1231 loss of $70,000. The net result is:
Select an option first.
Correct answer: D — A $20,000 net §1231 LOSS, treated as ORDINARY — fully deductible against ordinary income
Explanation: §1231 gives the BEST OF BOTH: net GAINS are LTCG (preferential rates); net LOSSES are ORDINARY (fully deductible, no $3,000 cap). Here the net is a $20,000 LOSS → ORDINARY, fully deductible. Treating it as a capital loss subject to the $3,000 limit (option C) is the intended trap.
Question 499
A taxpayer's AGI is $300,000. They have investment interest expense of $25,000, net investment income of $15,000 (excluding $20,000 of LTCG). The deduction is:
Select an option first.
Correct answer: B — $15,000 — capped at NET INVESTMENT INCOME; the taxpayer could ELECT to include the LTCG, raising the cap to $35,000, but would FORFEIT the preferential rate
Explanation: Investment interest is deductible up to NET INVESTMENT INCOME = $15,000. The excess $10,000 carries forward INDEFINITELY. The taxpayer MAY ELECT to treat LTCG/qualified dividends as ORDINARY, raising NII to $35,000 and allowing the full deduction — but that election FORFEITS the preferential capital gains rate on that income. It is a genuine trade-off, and comparing the two is exactly what a planning question demands.
Question 500
A taxpayer receives a residence as a GIFT (donor's basis $150,000; FMV $500,000) and lives in it as a principal residence for 3 years before selling for $600,000. The taxable gain (single filer) is:
Select an option first.
Correct answer: C — $200,000 — gain of $450,000 (carryover basis) LESS the $250,000 §121 exclusion
Explanation: The donee takes a CARRYOVER basis of $150,000 (FMV exceeds basis at gift). Gain = $600,000 − $150,000 = $450,000. §121 excludes $250,000 (single, having met the 2-of-5-year test). Taxable = $200,000. Using the $500,000 FMV as basis (option A) is the trap — that would be the rule for INHERITED property, not gifted.
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