Reg. § 1.1245-5 Adjustments to basis.
In order to reflect gain recognized under section , the following adjustments to the basis of property shall be made:
(a) Property acquired in like kind exchange or involuntary conversion
(1) If property is acquired in a transaction to which section applies, its basis shall be determined under the rules of section or .
(2) The provisions of this paragraph may be illustrated by the following example:
Example: Jones exchanges property A, which is section property with an adjusted basis of $10,000, for property B, which has a fair market value of $9,000, and property C, which has a fair market value of $3,500, in a like kind exchange as to which no gain would be recognized under section . Upon the exchange $2,500 gain is recognized under section , since property C is not section property. See section . Under the rules of section , the basis of the properties received in the exchange is $12,500 (i.e., the basis of property transferred, $10,000, plus the amount of gain recognized, $2,500), of which the amount allocated to property C is $3,500 (the fair market value thereof), and the residue, $9,000, is allocated to property B.
(b) Sections 1071 and 1081 transactions
(1) If property is acquired in a transaction to which section and (relating to limitation for section transactions, etc.) apply, its basis shall be determined in accordance with the principles of of this section.
(2) If the basis of property, other than section property, is reduced pursuant to either an election under section or the application of section 1082(a)(2), then the basis of the property shall be increased to the extent of the gain recognized under section by reason of the application of .
[T.D. 6832, 30 FR 8584, July 7, 1965]