Section: Property Transactions TCP

Estimated study time: 40 minutes

Content:

Advanced property transaction tax planning extends beyond the compliance rules covered in the REG core to strategic timing and structuring decisions.

Installment sale planning: Electing out of installment reporting accelerates income (may be desirable in low-tax years before rate increases or to use expiring losses). Interest rules on deferred payments — applicable federal rate (AFR) applies; if contract rate below AFR, IRS imputes interest (OID rules). Dealer vs. non-dealer distinction: dealers in property (real estate developers, car dealers) may not use installment method.

Section 1031 exchange planning: Identification requirement — within 45 days of transfer, taxpayer must identify replacement property (3-property rule or 200% rule or 95% rule). Exchange must be completed within 180 days of transfer (or tax return due date with extensions, if earlier). Related-party exchanges: 2-year holding requirement after exchange; if either party disposes within 2 years, gain recognition triggered. Revenue from personal property (equipment) no longer eligible for 1031 (post-TCJA); only real property.

Cost segregation studies: Separate components of a building with shorter MACRS lives from the 39-year (or 27.5-year residential) building structure. Components like specialty lighting, flooring, landscaping, parking lots, and electrical for specific equipment may qualify for 5-, 7-, or 15-year MACRS. Bonus depreciation (100% through 2022; phasing down 20% per year post-2022) amplifies benefit. Cost segregation + bonus depreciation = large current-year deductions for real property investors.

Qualified Opportunity Zones (QOZ): Invest capital gains in a Qualified Opportunity Fund (QOF) within 180 days of recognition. Benefits: deferral of original gain until 12/31/2026 (or earlier disposition); if QOF investment held ≥10 years, appreciation on QOF investment is tax-free. Original deferred gain recognized at lesser of original gain or FMV of QOF investment at 12/31/2026.

Section 1202 (QSBS — Qualified Small Business Stock): Gain on sale of QSBS held >5 years excludable from gross income up to 100% of gain (for stock acquired after 9/27/2010). Limits: excludable gain capped at greater of $10 million or 10× basis per issuer. Requirements: domestic C corporation, gross assets ≤$50 million at issuance, active business in qualified trade or business.

Key Terms:

• AFR (Applicable Federal Rate): IRS-published minimum interest rate for related-party loans and installment sales; below-market loans trigger imputed interest
• 45-Day Identification Rule: In a 1031 exchange, replacement property must be identified within 45 days of the transfer of the relinquished property
• Cost Segregation: Study to identify building components qualifying for shorter MACRS lives; accelerates depreciation deductions
• QOZ: Qualified Opportunity Zone; investments in a QOF within 180 days of capital gain recognition defer original gain and eliminate tax on QOF appreciation if held ≥10 years
• QSBS (Section 1202): Qualified small business stock; up to 100% gain exclusion if held >5 years and other requirements met
• Bonus Depreciation: Immediate 100% (phasing down post-2022) first-year depreciation for qualified property; combined with cost segregation creates large first-year deductions

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