Section 4: 10–20%T14
Gains, Losses, and Nonrecognition Transactions
Exam Insight
Character (ordinary vs. capital) and timing of recognition drive the actual tax cost of every sale, and OBBBA preserved 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.
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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.