IRS Enrolled Agent - SEE Part 1: Individuals (SEE-1) practice questions

Margaret Holloway inherited a parcel of investment land from her late aunt, who had owned it for nine years. Margaret sold the land four months after the date of her aunt's death and realised a gain. How is this gain classified for capital gains purposes?

• ALong-term, because property acquired from a decedent is automatically treated as held for more than one year.check_circle Correct
• BShort-term, because Margaret personally held the land for only four months before selling it.
• CLong-term only if Margaret's combined holding period plus her aunt's nine years exceeds one year.
• DShort-term, because the aunt's holding period cannot be tacked on after death.

Why A is correct: Under the inheritance rules, property acquired from a decedent receives automatic long-term treatment on sale, so the heir's actual holding period is irrelevant to classification.

Why B is wrong: This applies the ordinary holding-period count to inherited property, but property acquired from a decedent is treated as held long-term regardless of how long the heir actually owns it.

Why C is wrong: This describes a carryover or tacking concept that applies to gifts, not inheritances; inherited property does not require tacking because long-term treatment is automatic.

Why D is wrong: It is true that the aunt's period is not tacked, but the conclusion is wrong because inherited property is deemed long-term by statute rather than by tacking.

David and Priya Sharma, who file jointly, bought a house and lived in it as their main home from January 2019 until they moved out in June 2022. They rented the property to tenants from July 2022 and sold it in May 2024, realising a gain of 180,000 dollars. Are they eligible to exclude this gain under the principal-residence exclusion?

• ANo, because the property was rented out at the time of sale and was therefore not their principal residence.
• BYes, because they owned and used the home as their principal residence for at least two of the five years before the sale.check_circle Correct
• CNo, because once a home is converted to rental use the principal-residence exclusion is permanently forfeited.
• DYes, but only the portion of gain attributable to the period before they converted the home to rental use.

Why A is wrong: The exclusion looks at use during the five years before sale, not the status on the sale date, so rental at the moment of sale does not by itself disqualify them.

Why B is correct: Their main-home use from January 2019 to June 2022 gives well over two years of qualifying use within the five years ending on the May 2024 sale date, satisfying both tests.

Why C is wrong: Conversion to rental does not permanently forfeit the exclusion; eligibility turns on meeting the ownership and use tests within the five-year look-back period.

Why D is wrong: This confuses the basic exclusion with depreciation recapture; the qualifying gain is excludable in full up to the limit, although depreciation taken after May 1997 is separately recaptured.

Elena Vasquez sold 100 shares of Cobalt Industries at a 2,000 dollar loss on 10 March 2024. On 28 March 2024 she purchased 100 shares of the same Cobalt Industries stock. How are the loss and the basis of the newly purchased shares treated?

• AThe 2,000 dollar loss is disallowed and is permanently lost because the shares were repurchased.
• BThe 2,000 dollar loss is allowed in full because Elena sold the shares before repurchasing them.
• CThe 2,000 dollar loss is disallowed and is added to the basis of the newly purchased shares.check_circle Correct
• DThe 2,000 dollar loss is allowed because the repurchase occurred more than 14 days after the sale.

Why A is wrong: The loss is indeed disallowed currently, but it is not lost; the wash-sale rule preserves it by adding it to the replacement shares' basis.

Why B is wrong: Selling first does not avoid the rule; a wash sale arises whenever substantially identical stock is bought within 30 days before or after the loss sale.

Why C is correct: The repurchase falls inside the 30-day window, so the wash-sale rule disallows the loss and rolls the disallowed amount into the basis of the replacement shares, preserving it for a later sale.

Why D is wrong: The relevant period is 30 days, not 14; the 28 March purchase is 18 days after the 10 March sale and therefore within the disallowance window.