Study guide
12.1 Basis, Realized Gain, Recognized Gain, and Character
Uniform CPA Examination Exam
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1 Chapter 1: CPA Exam Structure and Licensure Rules
1.1 CPA Evolution Model 1.2 Eligibility, Credit Window, and Scheduling Rules 1.3 Scoring, Pass Rates, and Blueprints
2 Chapter 2: CPA Scoring, Interface, and Exam Strategy
Score Scale and Testlets MCQ/TBS Weighting by Section Sample Test Interface Tools Exam-Day Time Management
3 Chapter 3: AUD Ethics, Independence, and Engagement Acceptance
3.1 Professional Responsibilities and Independence 3.2 Engagement Acceptance and Continuance 3.3 Audit Documentation and Quality Management 3.4 Audit Risk Foundations
4 Chapter 4: AUD Risk Assessment, Controls, and Evidence
4.1 Assertions and Risk Assessment 4.2 Internal Control Design and Operating Effectiveness 4.3 Substantive Procedures and Audit Evidence 4.4 Sampling, Analytics, and Estimates
5 Chapter 21: AUD Sampling, Analytics, and Accounting Estimates
21.1 Audit Sampling Risk and Sample Design 21.2 Substantive Analytical Procedures 21.3 Estimates, Fair Value, and Specialists 21.4 Data Analytics, Exceptions, and Follow-Up
6 Chapter 22: AUD Integrated Audits, IT Controls, and SOC Reliance
22.1 ICFR Integrated Audit Framework 22.2 IT General Controls and Application Controls 22.3 Service Organizations, SOC Reports, and CUECs 22.4 Control Deficiencies and Material Weaknesses
7 Chapter 5: AUD Reporting, Attestation, and Review Engagements
5.1 Audit Opinions and Modifications 5.2 Emphasis, Other Matter, and Going Concern 5.3 Review, Compilation, and Preparation Engagements 5.4 Attestation and Government Auditing Signals
8 Chapter 36: AUD Workbook - From Risk to Report
36.1 Risk-Assertion-Procedure Drill 36.2 Evidence Reliability Drill 36.3 Control Deficiency Classification Drill 36.4 Report Modification Decision Drill
9 Chapter 6: FAR Financial Statements and Reporting Framework
6.1 Conceptual Framework and Standard Setting 6.2 Financial Statement Presentation 6.3 Cash Flow Statement and Disclosures 6.4 Not-for-Profit Reporting Basics
10 Chapter 7: FAR Balance Sheet Accounts and Rollforwards
7.1 Cash, Receivables, and Reconciliations 7.2 Inventory and Cost Flow Errors 7.3 Property, Equipment, and Intangibles 7.4 Debt, Equity, and Contingencies
11 Chapter 8: FAR Selected Transactions and Measurement Models
8.1 Revenue Recognition: Five-Step Model 8.2 Leases, Income Taxes, and Impairment 8.3 Business Combinations and Consolidations 8.4 Accounting Changes, Errors, and Subsequent Events
12 Chapter 32: FAR Revenue, Leases, and Income Taxes Deep Dive
32.1 Revenue Contract Modifications and Variable Consideration 32.2 Lease Classification and Lessee Accounting 32.3 Deferred Tax Assets, Liabilities, and Valuation Allowances 32.4 Simulation Workflows for Revenue, Lease, and Tax Exhibits
13 Chapter 31: FAR Financial Instruments, Fair Value, and Derivatives
31.1 Financial Asset Classification and Measurement 31.2 Fair Value Hierarchy and Disclosures 31.3 Derivatives, Hedge Accounting, and Embedded Features 31.4 Foreign Currency and Comprehensive Income Signals
14 Chapter 24: FAR Consolidations, Equity Method, and Intercompany Workpapers
24.1 Consolidation Decision and Noncontrolling Interest 24.2 Acquisition-Date Measurement and Goodwill 24.3 Equity Method Income, Dividends, and Impairment 24.4 Intercompany Inventory, Debt, and Fixed Asset Eliminations
15 Chapter 9: FAR Governmental Accounting and Fund Reporting
9.1 Governmental Fund Types and Basis 9.2 Government-Wide Statements and Reconciliations 9.3 Budgetary Accounting and Encumbrances 9.4 Governmental and NFP Comparison Traps
16 Chapter 23: FAR Not-for-Profit and Special Reporting Topics
23.1 Not-for-Profit Net Assets and Restrictions 23.2 Contributions, Conditional Gifts, and Agency Transactions 23.3 Functional Expenses and Statement Presentation 23.4 Interim, Segment, and EPS Reporting Traps
17 Chapter 37: FAR Workbook - Journal Entries, Rollforwards, and Reconciliations
Adjusting Entry Workflow Account Rollforward Workflow Reconciliation and Error Correction Drill Statement Presentation Workpaper Drill
18 Chapter 10: REG Tax Procedure, Ethics, and Business Law
10.1 Tax Practice Ethics and Preparer Responsibilities 10.2 IRS Procedure, Statutes, and Penalties 10.3 Contracts, Agency, and Business Entities 10.4 Secured Transactions, Bankruptcy, and Priority
19 Chapter 11: REG Individual Federal Tax Workflows
11.1 Gross Income, Exclusions, and Adjustments 11.2 Filing Status, Dependents, and Deductions 11.3 Credits, Payments, and AMT Concepts 11.4 Retirement, Passive Activity, and Loss Limitations
20 Chapter 12: REG Property Transactions and Entity Taxation
12.1 Basis, Realized Gain, Recognized Gain, and Character 12.2 C Corporations and Shareholder Transactions 12.3 S Corporations, Partnerships, and Basis 12.4 Entity Tax Simulations and K-1 Workflows
21 Chapter 25: REG Entity Choice, Basis, and Owner Tax Consequences
25.1 C Corporation, S Corporation, and Partnership Comparison 25.2 Formation Contributions and Built-In Gain 25.3 Distributions, Redemptions, and Liquidations 25.4 Loss Limits: Basis, At-Risk, and Passive Rules
22 Chapter 26: REG Property Tax, Character, and Deferral Transactions
26.1 Capital, Ordinary, and Section 1231 Character 26.2 Depreciation Recapture and Unrecaptured Gain 26.3 Like-Kind Exchanges, Involuntary Conversions, and Installment Sales 26.4 Related-Party, Wash-Sale, and Imputed-Interest Traps
23 Chapter 33: REG Trusts, Estates, Gifts, and Exempt Organizations
33.1 Trust and Estate Income Tax Basics 33.2 Gift, Estate, and Beneficiary Planning Concepts 33.3 Tax-Exempt Organizations and Unrelated Business Income 33.4 Fiduciary K-1 and Distribution Simulation Workflows
24 Chapter 38: REG Workbook - Tax Return Schedules and Basis Workpapers
38.1 Individual Return Classification Drill 38.2 Property Basis and Character Workpaper 38.3 Pass-through K-1 and Owner Basis Workpaper 38.4 Business Law Issue Spotting Drill
25 Chapter 13: BAR Business Analysis, Economics, and Forecasting
13.1 Financial Statement Analysis and Ratios 13.2 Variance, Forecasting, and Budgeting 13.3 Cost Accounting and Performance Management 13.4 Economics, Finance, and Decision Models
26 Chapter 14: BAR Technical Accounting and Advanced Reporting
14.1 Revenue, Leases, and Complex Arrangements 14.2 Derivatives, Hedges, and Fair Value 14.3 Business Combinations and Consolidations 14.4 SEC Reporting and Public Company Context
27 Chapter 15: BAR State and Local Government Analysis
15.1 Governmental Fund Analysis 15.2 Government-Wide Conversion Workflows 15.3 Budgetary Reconciliation and CAFR/ACFR Reading 15.4 Government Simulation Strategy
28 Chapter 16: ISC Information Systems and Data Management
16.1 Systems Architecture and Data Flow 16.2 ERP, Accounting Systems, and Change Management 16.3 Data Governance, SQL, and Analytics 16.4 Availability, Backup, and Recovery Controls
29 Chapter 17: ISC Security, Privacy, and SOC Engagements
17.1 Security Threats and Control Selection 17.2 Privacy, Confidentiality, and Compliance Frameworks 17.3 SOC 1, SOC 2, SOC 3, and Cybersecurity Reports 17.4 Service Organization Exceptions and User Controls
30 Chapter 18: TCP Individual Tax Planning and Personal Financial Issues
18.1 Nonroutine Individual Income and Estimated Tax 18.2 Passive, At-Risk, and Investment Planning 18.3 Retirement, Education, and Insurance Planning 18.4 Gift, Estate, and Beneficiary Concepts
31 Chapter 19: TCP Entity Compliance and Planning
19.1 C Corporation Tax Planning 19.2 S Corporation Basis and Distributions 19.3 Partnership Tax Planning and Allocations 19.4 Trusts, Tax-Exempt, and International Signals
32 Chapter 34: TCP International and Advanced Entity Tax Topics
34.1 International Tax Signals and Source of Income 34.2 CFC, Foreign Tax Credit, and Permanent Establishment Concepts 34.3 Consolidated Returns and Affiliated Corporations 34.4 Advanced Partnership and S Corp Planning Scenarios
33 Chapter 35: Choosing and Preparing for BAR, ISC, or TCP
35.1 Discipline Fit Matrix by Background 35.2 BAR, ISC, and TCP Blueprint and Skill Comparison 35.3 Discipline Study Plans and Practice Balance 35.4 Switching Disciplines, Retake, and Score Interpretation
34 Chapter 39: CPA TBS Research, Authoritative Literature, and Document Review
39.1 Document Review Simulation Method 39.2 Research and Authoritative Literature Workflow 39.3 Exhibit Overload and Relevant Data Selection 39.4 Written Explanation and Professional Judgment Drills
35 Chapter 20: CPA Simulations, Retakes, and Final Review
20.1 TBS Exhibit Triage and Workpaper Method 20.2 Section-Specific Final Review Plans 20.3 Score Release, Retake, and Credit Window Decisions 20.4 Four-Section Study Roadmaps
36 Chapter 40: Discipline Workbook Drills for BAR, ISC, and TCP
40.1 BAR Ratio, Variance, and Government Drill 40.2 ISC Control Evidence and SOC Drill 40.3 TCP Basis Planning and Entity Drill 40.4 Discipline Final Mock and Review Log
12.1 Basis, Realized Gain, Recognized Gain, and Character
Key Takeaways Explain This Topic AI
The 2026 AICPA REG Blueprint allocates 5-15% to Area III, Federal Taxation of Property Transactions, with emphasis on routine basis and cost recovery calculations.
Basis is the starting point for depreciation, amortization, gain, loss, and later distribution analysis, so a wrong basis usually contaminates the rest of a simulation.
Realized gain or loss is amount realized minus adjusted basis; recognized gain or loss is the amount currently included on the return after deferral or disallowance rules.
Character determines where an item is reported and how limitations apply; capital, ordinary, Section 1231, depreciation-recapture, and personal-use items are not interchangeable.
Gifted property uses a dual-basis rule, inherited property generally takes a date-of-death fair-market-value basis, and wash-sale losses shift into replacement-share basis.
Last updated: June 2026
Why Property Basis Drives REG
The 2026 AICPA REG Blueprint places Federal Taxation of Property Transactions in Area III, weighted 5-15% of the exam. REG itself runs four hours with 72 multiple-choice questions and 8 task-based simulations (TBSs), and a scaled passing score of 75. The Area III tasks focus on calculating basis for purchased business assets, assets converted from personal to business use, gifts, inheritances, wash-sale stock, and intangibles, plus reviewing depreciation and amortization schedules for completeness and accuracy.
A basis question is rarely isolated. Basis controls cost recovery, realized gain or loss, recognized gain or loss, character, and sometimes the shareholder or partner basis consequences in the next part of a TBS. Treat basis as a workpaper anchor, not a memorized label.
Basis First, Then Disposition
For purchased property, adjusted basis generally begins with cost plus capitalized acquisition costs (sales tax, freight, installation, legal fees) and is then reduced by depreciation allowed or allowable — meaning the IRS reduces basis for depreciation you should have taken even if you skipped it. Four special-acquisition rules generate most exam traps:
Converted personal-use property: depreciation basis is the lower of adjusted basis or fair market value (FMV) at the conversion date. Trap: using original cost when value declined.
Gifted property (dual basis): for gain the donee takes the donor's carryover basis; for loss the donee uses the lower of carryover basis or FMV at the gift date. If the sale price falls between the two, no gain or loss is recognized.
Inherited property: basis is generally the FMV at the date of death (or the alternate valuation date if elected), producing a step-up and automatic long-term holding period.
Wash sale: a loss on stock sold and repurchased within 30 days before or after is disallowed and added to the replacement shares' basis .
Fact pattern Basis rule Exam risk
Personal car converted to business Lower of adjusted basis or FMV at conversion Using original cost after value dropped
- Gifted stock later sold Dual basis: carryover for gain, FMV for loss Ignoring the no-gain-no-loss middle zone
- Inherited land FMV at date of death (or alternate date) Carrying over decedent's cost basis
- Wash-sale replacement shares Disallowed loss added to new basis Deducting the loss currently
- Section 197 intangible Capitalize, amortize over 15 years Expensing goodwill immediately
Realized, Recognized, and Character
Realized gain or loss equals amount realized minus adjusted basis . Amount realized includes money received, FMV of property received, and liabilities the taxpayer is relieved of . Recognized gain or loss is the amount currently reported after any nonrecognition, deferral (like-kind exchange of real property), or disallowance (related-party, wash sale) rule.
Worked example: a taxpayer sells equipment with a $40,000 cost, $25,000 accumulated depreciation (adjusted basis $15,000) for $22,000 cash. Realized gain is $22,000 - $15,000 = $7,000 . Because the asset is depreciable Section 1231 property, the gain up to prior depreciation is Section 1245 ordinary recapture — here the entire $7,000 is ordinary because it is below the $25,000 of recapture potential. Many candidates wrongly tag it as capital.
Character is a separate decision: stock sale = capital; inventory = ordinary; personal-use loss = nondeductible; depreciable business property = Section 1231 (net 1231 gain is long-term capital, net 1231 loss is ordinary), subject to Section 1245/1250 recapture first.
Cost Recovery and the Exam Workflow
Depreciation and amortization are basis-recovery systems under the Modified Accelerated Cost Recovery System (MACRS). The Blueprint expects candidates to review schedules and resolve automated diagnostic exceptions, so a TBS may include source data, fixed-asset detail, and a draft return. A clean review sequence:
Tie each asset to an invoice, closing statement, gift record, estate document, or trade confirmation.
Remove land (nondepreciable), personal-use items, and nondeductible costs from depreciable basis.
Verify placed-in-service dates and any business-use change.
Recalculate current-year recovery using the property class and convention given; do not invent indexed dollar limits.
Carry adjusted basis forward to the disposition or entity-basis schedule.
When a property task appears, write three labels on scratch: amount realized, adjusted basis, character . Compute adjusted basis after improvements and recovery, then amount realized, then decide whether the result is recognized now and whether it is ordinary, capital, Section 1231, recapture, or personal. That sequence keeps REG property questions from becoming correct facts applied in the wrong order.
Holding Period, Netting, and Recapture Traps
Character also depends on holding period . Capital assets held more than one year produce long-term gain or loss; one year or less is short-term. Inherited property is automatically long-term regardless of how long the heir holds it, and gifted property generally tacks the donor's holding period when carryover basis applies. The capital-gain netting process — short-term against short-term, long-term against long-term, then crossing — decides the final rate bucket, and a net capital loss for individuals deducts only $3,000 per year against ordinary income with the excess carried forward indefinitely.
For depreciable business property, the order of operations is strict and heavily tested: first apply Section 1245 (full ordinary recapture of prior depreciation on personalty), or Section 1250 (recapture of excess accelerated depreciation on realty, with unrecaptured 1250 gain taxed at a maximum 25% rate for individuals), and only the remaining gain is treated as Section 1231 gain. A net Section 1231 gain becomes long-term capital gain, but a five-year lookback rule recharacterizes that gain as ordinary to the extent of nonrecaptured net 1231 losses in the prior five years.
The single most common error here is jumping straight to capital-gain treatment without first stripping out depreciation recapture as ordinary income.