Determining basis
| How acquired | Basis |
|---|---|
| Purchase | Cost, including sales tax, freight, and installation |
| Gift | Generally 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 |
| Inheritance | FMV 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
| Property | Recovery period | Method / convention |
|---|---|---|
| Equipment, machinery | 5 or 7 years | 200% declining balance; half-year (or mid-quarter if >40% placed in service in Q4) |
| Residential rental | 27.5 years | Straight-line, mid-month |
| Nonresidential real | 39 years | Straight-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.