REG transaction coverage for nonrecognition, gain or loss character, and related-party transaction rules.
This part covers the transaction patterns that often turn a mostly correct tax answer into a wrong one. The main issues are whether gain or loss is recognized now, how it is characterized, and whether the relationship between the parties overrides a simpler rule.
Disposition questions require more than comparing amount realized with adjusted basis. REG candidates must decide whether recognition is deferred, whether gain or loss character changes the tax result, and whether related-party rules limit a deduction or shift the timing of recognition.
| Question focus | What to decide first | Common REG trap |
|---|---|---|
| Recognition | Whether the transaction produces current taxable gain or deductible loss. | Calculating gain correctly but ignoring a deferral or disallowance rule. |
| Nonrecognition | Whether replacement property, exchange structure, or conversion rules defer the result. | Treating every exchange as a taxable sale. |
| Character | Whether gain or loss is capital, ordinary, Section 1231, or subject to recapture. | Stopping after the amount of gain without determining its character. |
| Related parties | Whether the relationship changes loss deductibility, basis, or timing. | Applying arm’s-length sale logic to a relationship-based exception. |
| Step | What to determine | Tax effect |
|---|---|---|
| Identify the transaction form | Sale, exchange, involuntary conversion, related-party transfer, or other disposition. | Form determines whether a special rule applies. |
| Compute realized gain or loss | Amount realized, adjusted basis, liabilities, and transaction costs. | The realized amount is the starting point, not always the taxable amount. |
| Test recognition or deferral | Nonrecognition, disallowance, boot, replacement property, or related-party limits. | Recognition timing may differ from realization. |
| Determine character | Capital, ordinary, Section 1231, recapture, or special character rule. | Character changes rate, limitation, and reporting treatment. |
| Track basis and holding consequences | Replacement basis, transferee basis, carryover basis, and holding period. | Disposition rules often preserve consequences for later years. |
| Checkpoint | What to classify | Why it matters |
|---|---|---|
| Asset type | Capital asset, ordinary asset, Section 1231 property, inventory, receivable, or depreciable property. | Character begins with the property type. |
| Holding period | Short term, long term, or special holding-period rule. | Holding period can change rate and netting treatment. |
| Recognition limit | Nonrecognition, related-party loss disallowance, boot, or installment timing. | Realized gain or loss is not always recognized immediately. |
| Recapture exposure | Depreciation, Section 1245, Section 1250, or other ordinary-income conversion. | Recapture can override capital or Section 1231 treatment. |
| Basis carryover | Replacement, transferee, carryover, or substituted basis. | Deferred consequences often reappear in future dispositions. |