Tax Implications & Benefits Flashcards
6 cards from real CES practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Tax Implications & Benefits flashcards as text
A taxpayer has taken $100,000 in depreciation on the relinquished property. How does this affect the adjusted basis?
Answer: Adjusted basis decreases by $100,000
Accumulated depreciation reduces the adjusted basis, which in turn increases the realized gain when the property is sold.
What is the net investment income tax (NIIT) rate that may apply to gain recognized in a failed 1031 exchange for high-income taxpayers?
Answer: 3.8%
The NIIT is 3.8% and may apply to net investment income, including gain from the sale of investment property, for taxpayers above the income threshold.
When a taxpayer eventually sells the replacement property in a taxable sale, which basis is used to calculate gain?
Answer: The substituted (carryover) basis from the relinquished property
The substituted basis from the 1031 exchange is used to calculate gain when the replacement property is ultimately sold in a taxable transaction.
Which scenario would result in the greatest tax deferral benefit in a 1031 exchange?
Answer: Exchanging into a property of greater value with no boot received
Exchanging up in value with no boot received maximizes deferral by reinvesting all equity into a larger asset.
How does a 1031 exchange affect state income tax in states that do not conform to federal 1031 rules?
Answer: The taxpayer may owe state capital gains tax even if federal gain is deferred
Some states do not conform to federal 1031 exchange rules, meaning state capital gains tax may be due even when the federal gain is fully deferred.
What is the primary long-term estate planning advantage of a 1031 exchange strategy?
Answer: It allows accumulated deferred gains to be permanently wiped out via the stepped-up basis at death
The long-term estate planning power of 1031 exchanges lies in the ability to build wealth tax-deferred and ultimately receive a step-up in basis at death, permanently eliminating the deferred gain.