Section 4: 10–20%T14

Gains, Losses, and Nonrecognition Transactions

Exam insight

Character (ordinary vs. capital) and the timing of recognition drive the real tax cost of every sale, and OBBBA kept the 0/15/20% capital rates, the 3.8% NIIT, and the like-kind exchange limited to real property. The AICPA tests whether you can net gains and losses, apply Section 1231/1245/1250 recapture, and use nonrecognition rules to defer or reshape income.

What AICPA wants you to know

1Distinguish capital from ordinary character and run the short-term and long-term netting process, including the $3,000 individual capital loss limit.
2Apply Section 1231 netting (net gain = LTCG with a 5-year lookback; net loss = ordinary) and Section 1245/1250 depreciation recapture.
3Disallow losses under the wash sale rule and the Section 267 related-party rule and track the resulting basis adjustments.
4Compute recognized gain and substituted basis in a Section 1031 like-kind exchange with boot.
5Apply nonrecognition under Section 1033 involuntary conversions and the Section 121 home-sale exclusion ($250,000/$500,000).
6Use installment sale reporting under Section 453 to spread gain across years and plan recognition timing.

Patterns in this topic

The exam re-skins the same archetypes. Recognize these here, then drill them in the Pattern Lab.

The Disposition PlanNet first, then character: a 1231 net gain is capital and a net loss ordinary, 1245 recaptures depreciation, and 1031 and 121 defer or exclude.The Basis PlannerSet basis by how property arrived: donor carryover for gifts (with a dual loss basis), date-of-death step-up for inheritances, and add-back for wash sales.

Exam tip

Study smarter: before you expand each card, cover the screen and try to recall what the concept means from its title alone. Retrieving it from memory builds the recall the exam actually tests, and it beats re-reading.