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CPA/REG/Property Transactions: Basis & Cost Recovery

Property Transactions: Basis & Cost Recovery

Determining basis, MACRS depreciation, Section 179 expensing, and 100% bonus depreciation under OBBBA.

Hard 1 hr 10 minArea III: Federal Taxation of Property Transactions

Determining basis

How acquiredBasis
PurchaseCost, including sales tax, freight, and installation
GiftGenerally the donor's basis (carryover). But for computing a loss, use the lesser of donor's basis or FMV at the date of gift — the "double basis" rule
InheritanceFMV at date of death (or alternate valuation date if elected) — a step-up (or step-down). Always long-term holding period

EXAMPLE (double basis): Donor's basis $10,000, FMV at gift $6,000. If the donee later sells for $12,000 → gain of $2,000 (use $10,000). Sells for $4,000 → loss of $2,000 (use $6,000). Sells for $8,000 → no gain and no loss, because the price falls between the two bases.

MACRS at a glance

PropertyRecovery periodMethod / convention
Equipment, machinery5 or 7 years200% declining balance; half-year (or mid-quarter if >40% placed in service in Q4)
Residential rental27.5 yearsStraight-line, mid-month
Nonresidential real39 yearsStraight-line, mid-month

Section 179 and bonus depreciation after OBBBA

IMPORTANT — the One Big Beautiful Bill Act (OBBBA), testable on REG and TCP from July 1, 2026:

  • Bonus depreciation is restored to 100% and made permanent for qualifying property acquired after January 19, 2025 — it has no annual dollar cap and can create or increase a net operating loss.
  • Section 179 expensing limit increased to $2.5 million, with the phase-out threshold beginning at $4 million of property placed in service.

Key distinction: §179 is limited to taxable business income (excess carries forward) and phases out dollar-for-dollar above the threshold. Bonus depreciation has neither limitation. Order of application: §179 first, then bonus, then regular MACRS on any remaining basis.

EXAM TIP: Land is never depreciated. Land improvements (fences, parking lots) are 15-year property and can qualify for bonus depreciation.