Reg. § 1.1001-1 Computation of gain or loss.
(a) General rule Except as otherwise provided in subtitle A of the Code, the gain or loss realized from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent, is treated as income or as loss sustained. The amount realized from a sale or other disposition of property is the sum of any money received plus the fair market value of any property (other than money) received. The fair market value of property is a question of fact, but only in rare and extraordinary cases will property be considered to have no fair market value. The general method of computing such gain or loss is prescribed by section (a) through (d) which contemplates that from the amount realized upon the sale or exchange there shall be withdrawn a sum sufficient to restore the adjusted basis prescribed by section and the regulations thereunder (i.e., the cost or other basis adjusted for receipts, expenditures, losses, allowances, and other items chargeable against and applicable to such cost or other basis). The amount which remains after the adjusted basis has been restored to the taxpayer constitutes the realized gain. If the amount realized upon the sale or exchange is insufficient to restore to the taxpayer the adjusted basis of the property, a loss is sustained to the extent of the difference between such adjusted basis and the amount realized. The basis may be different depending upon whether gain or loss is being computed. For example, see section and the regulations thereunder. Section and of this section prescribe the method of computing gain or loss upon the sale or other disposition of a term interest in property the adjusted basis (or a portion) of which is determined pursuant, or by reference, to section (relating to the basis of property acquired from a decedent), section (relating to the basis of property acquired by gift or by a transfer in trust), or section (relating to the basis of property acquired from certain decedents who died in 2010). For rules determining the amount realized for purposes of computing the gain or loss upon the sale, exchange, or other disposition of digital assets, as defined in , other than a digital asset not required to be reported as a digital asset pursuant to , , or , see .
(b) Real estate taxes as amounts received
(1) Section and section state rules applicable in making an adjustment upon a sale of real property with respect to the real property taxes apportioned between seller and purchaser under section . Thus, if the seller pays (or agrees to pay) real property taxes attributable to the real property tax year in which the sale occurs, he shall not take into account, in determining the amount realized from the sale under section , any amount received as reimbursement for taxes which are treated under section as imposed upon the purchaser. Similarly, in computing the cost of the property under section , the purchaser shall not take into account any amount paid to the seller as reimbursement for real property taxes which are treated under section as imposed upon the purchaser. These rules apply whether or not the contract of sale calls for the purchaser to reimburse the seller for such real property taxes paid or to be paid by the seller.
(2) On the other hand, if the purchaser pays (or is to pay) an amount representing real property taxes which are treated under section as imposed upon the seller, that amount shall be taken into account both in determining the amount realized from the sale under section and in computing the cost of the property under section . It is immaterial whether or not the contract of sale specifies that the sale price has been reduced by, or is in any way intended to reflect, the taxes allocable to the seller. See also .
(3) Subparagraph (1) of this paragraph shall not apply to a seller who, in a taxable year prior to the taxable year of sale, pays an amount representing real property taxes which are treated under section as imposed on the purchaser, if such seller has elected to capitalize such amount in accordance with section and the regulations thereunder (relating to election to capitalize certain carrying charges and taxes).
(4) The application of this paragraph may be illustrated by the following examples:
Example 1. Assume that the contract price on the sale of a parcel of real estate is $50,000 and that real property taxes thereon in the amount of $1,000 for the real property tax year in which occurred the date of sale were previously paid by the seller. Assume further that $750 of the taxes are treated under section as imposed upon the purchaser and that he reimburses the seller in that amount in addition to the contract price. The amount realized by the seller is $50,000. Similarly, $50,000 is the purchaser's cost. If, in this example, the purchaser made no payment other than the contract price of $50,000, the amount realized by the seller would be $49,250, since the sales price would be deemed to include $750 paid to the seller in reimbursement for real property taxes imposed upon the purchaser. Similarly, $49,250 would be the purchaser's cost.
Example 2. Assume that the purchaser in example (1), above, paid all of the real property taxes. Assume further that $250 of the taxes are treated under section as imposed upon the seller. The amount realized by the seller is $50,250. Similarly, $50,250 is the purchaser's cost, regardless of the taxable year in which the purchaser makes actual payment of the taxes.
Example 3. Assume that the seller described in the first part of example (1), above, paid the real property taxes of $1,000 in the taxable year prior to the taxable year of sale and elected under section to capitalize the $1,000 of taxes. In such a case, the amount realized is $50,750. Moreover, regardless of whether the seller elected to capitalize the real property taxes, the purchaser in that case could elect under section to capitalize the $750 of taxes treated under section as imposed upon him, in which case his adjusted basis would be $50,750 (cost of $50,000 plus capitalized taxes of $570).
(c) Other rules
(1) Even though property is not sold or otherwise disposed of, gain is realized if the sum of all the amounts received which are required by section and other applicable provisions of subtitle A of the Code to be applied against the basis of the property exceeds such basis. Except as otherwise provided in section with respect to distributions out of increase in value of property accrued prior to March 1, 1913, such gain is includible in gross income under section as “income from whatever source derived”. On the other hand, a loss is not ordinarily sustained prior to the sale or other disposition of the property, for the reason that until such sale or other disposition occurs there remains the possibility that the taxpayer may recover or recoup the adjusted basis of the property. Until some identifiable event fixes the actual sustaining of a loss and the amount thereof, it is not taken into account.
(2) The provisions of subparagraph (1) of this paragraph may be illustrated by the following example:
Example: A, an individual on a calendar year basis, purchased certain shares of stock subsequent to February 28, 1913, for $10,000. On January 1, 1954, A's adjusted basis for the stock had been reduced to $1,000 by reason of receipts and distributions described in sections and . He received in 1954 a further distribution of $5,000, being a distribution covered by section , other than a distribution out of increase of value of property accrued prior to March 1, 1913. This distribution applied against the adjusted basis as required by section exceeds that basis by $4,000. The $4,000 excess is a gain realized by A in 1954 and is includible in gross income in his return for that calendar year. In computing gain from the stock, as in adjusting basis, no distinction is made between items of receipts or distributions described in section . If A sells the stock in 1955 for $5,000, he realizes in 1955 a gain of $5,000, since the adjusted basis of the stock for the purpose of computing gain or loss from the sale is zero.
(d) Installment sales In the case of property sold on the installment plan, special rules for the taxation of the gain are prescribed in section .
(e) Transfers in part a sale and in part a gift
(1) Where a transfer of property is in part a sale and in part a gift, the transferor has a gain to the extent that the amount realized by him exceeds his adjusted basis in the property. However, no loss is sustained on such a transfer if the amount realized is less than the adjusted basis. For the determination of basis of property in the hands of the transferee, see . For the allocation of the adjusted basis of property in the case of a bargain sale to a charitable organization, see .
(2) Examples The provisions of subparagraph (1) may be illustrated by the following examples:
Example 1. A transfers property to his son for $60,000. Such property in the hands of A has an adjusted basis of $30,000 (and a fair market value of $90,000). A's gain is $30,000, the excess of $60,000, the amount realized, over the adjusted basis, $30,000. He has made a gift of $30,000, the excess of $90,000, the fair market value, over the amount realized, $60,000.
Example 2. A transfers property to his son for $30,000. Such property in the hands of A has an adjusted basis of $60,000 (and a fair market value of $90,000). A has no gain or loss, and has made a gift of $60,000, the excess of $90,000, the fair market value, over the amount realized, $30,000.
Example 3. A transfers property to his son for $30,000. Such property in A's hands has an adjusted basis of $30,000 (and a fair market value of $60,000). A has no gain and has made a gift of $30,000, the excess of $60,000, the fair market value, over the amount realized, $30,000.
Example 4. A transfers property to his son for $30,000. Such property in A's hands has an adjusted basis of $90,000 (and a fair market value of $60,000). A has sustained no loss, and has made a gift of $30,000, the excess of $60,000, the fair market value, over the amount realized, $30,000.
(f) Sale or other disposition of a term interest in property
(1) General rule Except as otherwise provided in of this section, for purposes of determining gain or loss from the sale or other disposition after October 9, 1969, of a term interest in property (as defined in of this section), a taxpayer shall not take into account that portion of the adjusted basis of such interest that is determined pursuant, or by reference, to section (relating to the basis of property acquired from a decedent), section (relating to the basis of property acquired by gift or by a transfer in trust), or section (relating to the basis of property acquired from certain decedents who died in 2010) to the extent that such adjusted basis is a portion of the adjusted uniform basis of the entire property (as defined in ). Where a term interest in property is transferred to a corporation in connection with a transaction to which section applies and the adjusted basis of the term interest:
(i) Is determined pursuant to sections , , or ; and
(ii) Is also a portion of the adjusted uniform basis of the entire property, a subsequent sale or other disposition of such term interest by the corporation will be subject to the provisions of section and this to the extent that the basis of the term interest so sold or otherwise disposed of is determined by reference to its basis in the hands of the transferor as provided by section . See of this section for rules relating to the characterization of stock received by the transferor of a term interest in property in connection with a transaction to which section applies. That portion of the adjusted uniform basis of the entire property that is assignable to such interest at the time of its sale or other disposition shall be determined under the rules provided in . Thus, gain or loss realized from a sale or other disposition of a term interest in property shall be determined by comparing the amount of the proceeds of such sale with that part of the adjusted basis of such interest that is not a portion of the adjusted uniform basis of the entire property.
(2) Term interest defined For purposes of section and this paragraph, a term interest in property means—
(i) A life interest in property,
(ii) An interest in property for a term of years, or
(iii) An income interest in a trust.
Generally, subdivisions (i), (ii), and (iii) refer to an interest, present or future, in the income from property or the right to use property which will terminate or fail on the lapse of time, on the occurrence of an event or contingency, or on the failure of an event or contingency to occur. Such divisions do not refer to remainder or reversionary interests in the property itself or other interests in the property which will ripen into ownership of the entire property upon termination or failure of a preceding term interest. A term interest in property also includes any property received upon a sale or other disposition of a life interest in property, an interest in property for a term of years, or an income interest in a trust by the original holder of such interest, but only to the extent that the adjusted basis of the property received is determined by reference to the adjusted basis of the term interest so transferred.
(3) Exception Paragraph (1) of section and subparagraph (1) of this paragraph shall not apply to a sale or other disposition of a term interest in property as a part of a single transaction in which the entire interest in the property is transferred to a third person or to two or more other persons, including persons who acquire such entire interest as joint tenants, tenants by the entirety, or tenants in common. See for computation of gain or loss upon such a sale or other disposition where the property has been acquired from a decedent or by gift or transfer in trust.
(4) Illustrations For examples illustrating the application of this paragraph, see .
(g) Debt instruments issued in exchange for property
(1) In general If a debt instrument is issued in exchange for property, the amount realized attributable to the debt instrument is the issue price of the debt instrument as determined under or , whichever is applicable. If, however, the issue price of the debt instrument is determined under section , the amount realized attributable to the debt instrument is its stated principal amount reduced by any unstated interest (as determined under section ).
(2) Certain debt instruments that provide for contingent payments
(i) In general of this section does not apply to a debt instrument subject to either or (certain contingent payment debt instruments issued for nonpublicly traded property).
(ii) Special rule to determine amount realized If a debt instrument subject to is issued in exchange for property, and the income from the exchange is not reported under the installment method of section , the amount realized attributable to the debt instrument is the issue price of the debt instrument as determined under , increased by the fair market value of the contingent payments payable on the debt instrument. If a debt instrument subject to is issued in exchange for property, and the income from the exchange is not reported under the installment method of section , the amount realized attributable to the debt instrument is its stated principal amount, reduced by any unstated interest (as determined under section ), and increased by the fair market value of the contingent payments payable on the debt instrument. This , however, does not apply to a debt instrument if the fair market value of the contingent payments is not reasonably ascertainable. Only in rare and extraordinary cases will the fair market value of the contingent payments be treated as not reasonably ascertainable.
(3) Coordination with section 453 If a debt instrument is issued in exchange for property, and the income from the exchange is not reported under the installment method of section , this applies rather than to determine the taxpayer's amount realized attributable to the debt instrument.
(4) Effective date This applies to sales or exchanges that occur on or after August 13, 1996.
(h) Severances of trusts
(1) In general The severance of a trust (including without limitation a severance that meets the requirements of or of ) is not an exchange of property for other property differing materially either in kind or in extent if—
(i) An applicable state statute or the governing instrument authorizes or directs the trustee to sever the trust; and
(ii) Any non-pro rata funding of the separate trusts resulting from the severance (including non-pro rata funding as described in or ), whether mandatory or in the discretion of the trustee, is authorized by an applicable state statute or the governing instrument.
(2) Effective/applicability date This applies to severances occurring on or after August 2, 2007. Taxpayers may apply this to severances occurring on or after August 24, 2004, and before August 2, 2007.
(i) Effective/applicability date Except as provided in and of this section, this section applies on and after January 19, 2017. For rules before January 19, 2017, see § as contained in 26 CFR part 1 revised as of April 1, 2016.
[T.D. 6500, 25 FR 11910, Nov. 26, 1960, as amended by T.D. 7142, 36 FR 18950, Sept. 24, 1971; T.D. 7207, 37 FR 20797, Oct. 5, 1972; T.D. 7213, 37 FR 21992, Oct. 18, 1972; T.D. 8517, 59 FR 4807, Feb. 2, 1994; T.D. 8674, 61 FR 30139, June 14, 1996; T.D. 9348, 72 FR 42293, Aug. 2, 2007; T.D. 9729, 80 FR 48250, Aug. 12, 2015; T.D. 9811, 82 FR 6240, Jan. 19, 2017; T.D. 10000, 89 FR 56543, July 9, 2024]