Reg. § 1.1250-3 Exceptions and limitations.
(a) Exception for gifts
(1) General rule Section provides that no gain shall be recognized under section upon a disposition by gift. For purposes of this paragraph, the term gift shall have the same meaning as in . For reduction in amount of charitable contribution in case of a gift of section property, see section and .
(2) Disposition in part a sale or exchange and in part a gift Where a disposition of property is in part a sale or exchange and in part a gift, the disposition shall be subject to the provisions of and the gain to which section applies, shall be computed under that section.
(3) Treatment of property in hands of transferee If property is disposed of in a transaction which is a gift:
(i) The additional depreciation for the property in the hands of the transferee immediately after the disposition shall be an amount equal to (a) the amount of the additional depreciation for the property in the hands of the transferor immediately before the disposition, minus (b) the amount of any gain (in case the disposition is in part a sale or exchange and in part a gift) which would have been taken into account under section by the transferor upon the disposition if the applicable percentage had been 100 percent.
(ii) For purposes of computing the applicable percentage, the holding period under section of property received as a gift in the hands of the transferee includes the transferor's holding period,
(iii) In case of a disposition which is in part a sale or exchange and in part a gift, if the adjusted basis of the property in the hands of the transferee exceeds its adjusted basis immediately before the transfer, the excess is an addition to capital account under (relating to property with 2 or more elements), and
(iv) If the property disposed of consists of two or more elements within the meaning of , see for the amount of additional depreciation and holding period for each element in the hands of the transferee.
(4) Examples The provisions of this paragraph may be illustrated by the following examples:
Example 1.
(i) On May 15, 1967, Smith transfers section property to his son for $45,000. In the hands of Smith the property had an adjusted basis of $40,000 and a fair market value of $70,000. Thus, the gain realized is $5,000 (amount realized, $45,000, minus adjusted basis, $40,000), and Smith has made a gift of $25,000 (fair market value, $70,000, minus amount realized, $45,000).
(ii) Smith's holding period for the property is 80 full months and, thus, the applicable percentage under section is 40 percent. The additional depreciation for the property is $10,000. Since the gain realized ($5,000) is lower than the additional depreciation ($10,000), Smith recognized as ordinary income under section gain of $2,000 (that is, applicable percentage, 40 percent, multiplied by gain realized, $5,000) and the $3,000 remaining portion of the gain realized may be treated as gain from the sale of property described in section .
(iii) On the date the son receives the property, the additional depreciation for the property in his hands is $5,000, that is, the additional depreciation for the property in the hands of the father immediately before the transfer ($10,000), minus the gain which would have been recognized under section upon the transfer if the applicable percentage had been 100 percent ($5,000); for purposes of computing applicable percentage his holding period is his father's holding period of 80 full months; and under his unadjusted basis for the property is $45,000, that is, the amount he paid ($45,000) plus the excess (zero) of his father's adjusted basis over such amount.
(iv) The son sells the property for $80,000 on March 15, 1968, 10 full months after he received it from his father. Thus, his holding period is 90 full months (his father's holding period of 80 full months plus the 10 full months the son actually owned the property) and the applicable percentage under section is 30 percent. Assume that no depreciation was allowed or allowable to the son. Thus, the son's adjusted basis and additional depreciation for the property on the date of the sale is the same as on the date he received it. Accordingly, the gain realized is $35,000 (selling price of $80,000, minus adjusted basis of $45,000). Since the additional depreciation ($5,000) is lower than the gain realized ($35,000), the son recognizes as ordinary income under section gain of $1,500, that is, applicable percentage (30 percent) multiplied by additional depreciation ($5,000).
Example 2. Assume the same facts as in example (1), except that the son sells the property on June 15, 1969, 25 full months after he received it from his father. Thus, his holding period is 105 full months (his father's holding period of 80 full months plus the 25 full months the son actually owned the property) and the applicable percentage under section is 15 percent. Assume further that on the date of the sale the adjusted basis of the property is $39,000, and that for the period the son actually owned the property there is a deficit in additional depreciation of $2,000. Accordingly, the gain realized is $41,000 (selling price of $80,000, minus adjusted basis of $39,000), and the additional depreciation for the property is $3,000 (that is, the additional depreciation for the property in the hands of the son on the date he received it, as determined in example (1), $5,000, minus the amount of the deficit in additional depreciation for the period the son actually owned the property, ($2,000). Since the additional depreciation ($3,000) is lower than the gain realized ($41,000), the son recognizes as ordinary income under section gain of $450, that is, applicable percentage (15 percent) multiplied by additional depreciation ($3,000).
(b) Exception for transfers at death
(1) General rule Section provides that, except as provided in section (relating to income in respect of a decedent), no gain shall be recognized under section upon a transfer at death. For purposes of this paragraph, the term transfer at death shall have the same meaning as in .
(2) Treatment of transferee
(i) If as of the date a person acquires property from a decedent such person's basis is determined, by reason of the application of section , solely by reference to the fair market value of the property on the date of the decedent's death or on the applicable date provided in section (relating to alternate valuation date), then
(a) on the date of death the additional depreciation for the property is zero, and
(b) for purposes of computing applicable percentage the holding period of the property under section is deemed to begin on the day after the date of death.
(ii) If property is acquired in a transfer at death to which section applies, the amount of the additional depreciation for the property in the hands of the transferee immediately after the transfer shall be the amount (if any) of the additional depreciation in respect of the property allowed the transferee before the decedent's death, but only to the extent that the basis of the property (determined under section ) is required to be reduced under the second sentence of section (relating to adjustments to basis where property is acquired from a decedent prior to his death) by depreciation adjustments referred to in which give rise to such additional depreciation. For treatment of such property as having a special element with additional depreciation so computed, see (relating to property with two or more elements). For purposes of determining applicable percentage, such special element shall have a holding period which includes the transferee's holding period for such property for the period before the decedent's death.
(3) Examples The provisions of this paragraph may be illustrated by the following examples:
Example 1. On March 6, 1966, Smith dies owning an item of section property. On March 7, 1968, the executor distributes the property to Smith's son pursuant to a specific bequest of the property in Smith's will. Under section and , the unadjusted basis of the property in the hands of the son is its fair market value on March 6, 1966 (the date Smith died), and the son is considered to have acquired the property on such date. Under section , the son's holding period for the property begins on March 7, 1966 (the day after the day he is considered to have acquired the property). Thus, on March 7, 1968 (the date the property was distributed to the son), the holding period for the property is 24 full months, and the applicable percentage under section is 96 percent. On such date, the additional depreciation for the property includes any additional depreciation in respect of the property for the period the property was possessed by the estate.
Example 2. H purchases section property in 1965 which he immediately conveys to himself and W, his wife, as tenants by the entirety. Under local law each spouse is entitled to one-half the income from the property. H and W file joint income tax returns for calendar years 1965, 1966, and 1967. Over the 3 years, depreciation allowed in respect of the property was $4,000 (the amount allowable) of which $500 is additional depreciation. One-half of these amounts are allocable to W. Thus, depreciation deductions of $2,000, of which $250 is additional depreciation, are allowable to W. On January 1, 1968, H dies and the entire value of the property at the date of death is included in H's gross estate. Since W's basis for the property (determined under section ) is reduced (under the second sentence of section ) by the $2,000 depreciation deductions allowed W before H's death of which $250 is additional depreciation, the additional depreciation for the property in the hands of W immediately after H's death is $250.
(c) Limitation for certain tax-free transactions
(1) General Section provides that upon a transfer of property described in subparagraph (2) of this paragraph, the amount of gain taken into account by the transferor under section shall not exceed the amount of gain recognized to the transferor on the transfer (determined without regard to section ). For purposes of this subparagraph, in case of a transfer of both section property and nonsection 1250 property in one transaction, the amount realized from the disposition of the section property shall be deemed to consist of that portion of the fair market value of each property acquired which bears the same ratio to the fair market value of such acquired property as the amount realized from the disposition of the section property bears to the total amount realized. The preceding sentence shall be applied solely for purposes of computing the portion of the total gain (determined without regard to section ) which shall be recognized as ordinary income under section . Section does not apply to a disposition of property to an organization (other than a cooperative described in section ) which is exempt from the tax imposed by chapter 1 of the Code.
(2) Transfers covered The transfers described in this subparagraph are transfers of property in which the basis of the property in the hands of the transferee is determined by reference to its basis in the hands of the transferor by reason of the application of any of the following provisions:
(i) Section (relating to distributions in complete liquidation of an 80 percent or more controlled subsidiary corporation). For application of section to such a complete liquidation, the principles of shall apply.
(ii) Section (relating to transfer to a corporation controlled by transferor).
(iii) Section (relating to exchanges pursuant to certain corporate reorganizations).
(iv) Section 371(a) (relating to exchanges pursuant to certain receivership and bankruptcy proceedings).
(v) Section (relating to exchanges pursuant to certain railroad reorganizations).
(vi) Section (relating to transfers to a partnership in exchange for a partnership interest).
(vii) Section (relating to distributions by a partnership to a partner). For special carryover basis rule, see section and of this section.
(3) Treatment of property in hands of transferee In the case of a transfer described in subparagraph (2) (other than subdivision (vii) thereof) of this paragraph:
(i) The additional depreciation for the property in the hands of the transferee immediately after the disposition shall be an amount equal to
(a) the amount of the additional depreciation for the property in the hands of the transferor immediately before the disposition, minus
(b) the amount of additional depreciation necessary to produce an amount equal to the gain taken into account under section by the transferor upon the disposition (taking into account the applicable percentage for the property),
(ii) For purposes of computing applicable percentage, the holding period under section 1250(e)(2) of the property in the hands of the transferee includes the transferor's holding period,
(iii) If the adjusted basis of the property in the hands of the transferee exceeds its adjusted basis immediately before the transferee, the excess is an addition to capital account under (relating to property with 2 or more elements), and
(iv) If the property disposed of consists of 2 or more elements within the meaning of , see for the amount of additional depreciation and the holding period for each element in the hands of the transferee.
(4) Examples The provisions of this paragraph may be illustrated by the following examples:
Example 1.
(i) Green transfers section property on March 1, 1968, to a corporation, which is not exempt from taxation, in exchange for cash of $9,000 and stock in the corporation worth $91,000, in a transaction qualifying under section . Thus, the amount realized is $100,000 ($9,000 plus $91,000). The property has an applicable percentage under section of 60 percent, an adjusted basis of $40,000, and additional depreciation of $20,000. The gain realized is $60,000, that is, amount realized ($100,000) minus adjusted basis ($40,000). Since the additional depreciation ($20,000) is lower than the gain realized ($60,000), the amount of gain which would be treated as ordinary income under section would be $12,000 (60 percent of $20,000) if the limitation provided in section did not apply. Since under section gain in the amount of $9,000 would be recognized to the transferor without regard to section , the limitation provided in section limits the gain taken into account by the transferor under section to $9,000.
(ii) The amount of additional depreciation for the property in the hands of the transferee immediately after the transfer is $5,000, that is, the amount of additional depreciation before the transfer ($20,000) minus the amount of additional depreciation necessary to produce an amount equal to the gain recognized under section upon the transfer ($15,000, that is, $9,000 of gain recognized divided by 60 percent, the applicable percentage). (If the property is subsequently disposed of, and for the period after the initial transfer there is additional depreciation in respect of the property, then at the time of the subsequent disposition the additional depreciation will exceed $5,000. If, however, for the period after the initial transfer there was a deficit in additional depreciation, then at the time of the subsequent disposition the additional depreciation would be less than $5,000.)
Example 2.
(i) Assume the same facts as in example (1) except that the additional depreciation is $10,000. Since additional depreciation ($10,000) is lower than the gain realized ($60,000), the amount of gain which would be treated as ordinary income under section would be $6,000 (60 percent of $10,000) if the limitation provided in section did not apply. Since under section gain in the amount of $9,000 would be recognized to the transferor without regard to section , the limitation under section does not prevent treatment of the entire $6,000 as ordinary income under section . The $3,000 remaining portion of the $9,000 gain may be treated as gain from the sale of property described in section .
(ii) Immediately after the transfer, the amount of additional depreciation is zero, that is, the amount of additional depreciation before the transfer ($10,000) minus the amount of additional depreciation necessary to produce an amount equal to the gain taken into account under section upon the transfer ($10,000) that is, $6,000 divided by 60 percent.
Example 3.
(i) Miller transfers section property after December 31, 1969, to a corporation, which is not exempt from taxation, in exchange for cash of $9,000 and stock in the corporation worth $31,000, in a transaction qualifying under section . Thus, the amount realized is $40,000 ($9,000 plus $31,000). The property has an applicable percentage under of this section of 100 percent and an applicable percentage under of this section of 50 percent. The adjusted basis of the property on the date of the transfer is $24,000, and the gain realized is $16,000 (that is, amount realized, $40,000, minus adjusted basis, $24,000). The additional depreciation attributable to periods after December 31, 1969, is $8,000 and the additional depreciation attributable to periods before January 1, 1970, is $12,000. Since the additional depreciation attributable to periods after December 31, 1969 ($8,000), is lower than the gain realized ($16,000), the amount of gain which would be recognized as ordinary income under section would be $8,000 (100 percent of $8,000) if the limitation provided in section did not apply. In addition, gain is recognized under section since there is a remaining potential gain of $8,000 (that is, gain realized, $16,000, minus additional depreciation attributable to periods after December 31, 1969 ($8,000)). Since the remaining potential gain ($8,000) is lower than the additional depreciation attributable to periods before January 1, 1970 ($12,000), the amount of gain which would be recognized under section would be $4,000 (50 percent of $8,000) if the limitation in section did not apply. Since under section gain in the amount of $9,000 would be recognized to the transferor without regard to section , the limitation in section limits the gain taken into account by the transferor under section to $9,000. Since the section gain is considered as recognized first under , of the $9,000 of gain recognized, $8,000 is recognized under section and $1,000 is recognized under section .
(ii) The amount of additional depreciation for the property in the hands of the transferee immediately after the transfer is $10,000, the amount of additional depreciation immediately before the transfer ($20,000), minus the sum of (a) the amount of additional depreciation necessary to produce an amount equal to the gain recognized under section upon the transfer, $8,000 (that is, gain recognized under section , $8,000, divided by 100 percent, the applicable percentage under section ), plus (b) the amount of additional depreciation necessary to produce an amount equal to the gain recognized under section upon the transfer, $2,000 (that is, gain recognized under section , $1,000, divided by 50 percent, the applicable percentage under section ). Of this amount, zero (that is, $8,000 minus $8,000) is attributable to periods after December 31, 1969, and $10,000 ($12,000 minus $2,000) is attributable to periods before January 1, 1970.
(d) Limitation for like kind exchanges and involuntary conversions
(1) Limitation on gain
(i) Under section , if property is disposed of and gain (determined without regard to section ) is not recognized in whole or in part under section (relating to like kind exchanges) or section (relating to involuntary conversions), then the amount of gain taken into account by the transferor under section shall not exceed the greater of the two limitations set forth in subdivisions (ii) and (iii) of this subparagraph. Immediately after the transfer the basis of the acquired property shall be determined under subparagraph (2), (3), or (4) (whichever is applicable) of this paragraph, and its additional depreciation shall be computed under subparagraph (5) of this paragraph. The holding period of the acquired property for purposes of computing applicable percentage, which is determined under section , does not include the holding period of the property disposed of. In the case of a disposition of section property and other property in one transaction, see subparagraph (6) of this paragraph. In case of a disposition described in section of a portion of this item of property, see subparagraph (7) of this paragraph.
(ii) For purposes of this subparagraph, the first limitation is the sum of:
(a) The amount of gain recognized on the disposition under section or (determined without regard to section ), plus
(b) An amount equal to the cost of any stock purchased in a corporation which (without regard to section ) would result in nonrecognition of gain under section .
(iii) For purposes of this subparagraph, the second limitation is the excess (if any) of:
(a) The amount of gain which would (without regard to section ) be taken into account under section , over
(b) The fair market value (or cost in the case of a transaction described in section ) of the section property acquired in the transaction.
(iv) The provisions of this subparagraph may be illustrated by the following example:
Example:
A taxpayer receives $96,000 of insurance proceeds upon the destruction of section property by fire. If section did not apply to the disposition, $16,000 of gain would be recognized under section . In acquisitions qualifying under section , he uses $90,000 of the proceeds to purchase property similar or related in service or use to the property destroyed, of which $42,000 is for one item of section property and $48,000 is for one piece of land, and $5,000 of the proceeds to purchase stock in the acquisition of control of a corporation owning property similar or related in service or use to the property destroyed. The taxpayer properly elects under section and the regulations thereunder to limit recognition of gain (determined without regard to section ) to $1,000, that is, the excess of the amount realized from the conversion ($96,000) over the cost of the property acquired in acquisitions qualifying under section ($95,000, that is, $90,000 plus $5,000). The amount of gain recognized under section is $6,000, determined in the following manner:
| The first limitation: | |
| (a) Amount of gain recognized under section 1033(a)(3), determined without regard to section 1250(a) | $1,000 |
| (b) Fair market value of stock in a corporation which qualifies under section 1033(a)(3)(A) | 5,000 |
| (c) Sum of (a) plus (b) | 6,000 |
| The second limitation: | |
| (d) Amount of gain which would be recognized under section 1250(a) if section 1250(d)(4) did not apply | 16,000 |
| (e) Cost of section 1250 property acquired in transaction | 42,000 |
| (f) Excess of (d) over (e) | 0 |
Since the first limitation ($6,000) exceeds the second limitation (zero), the amount of gain recognized under section is $6,000. The balance ($10,000) of the gain realized ($16,000) is not recognized.
(2) Basis of property purchased upon involuntary conversion into money
(i) If section property is purchased in a compulsory or involuntary conversion to which section applies, and if by reason of the application of section all or part of the gain computed under section is not taken into account, then the basis of the section property and other purchased property shall be determined under the rules prescribed in this subparagraph. See section .
(ii) The total basis of all purchased property, the acquisition of which results in the nonrecognition of any part of the gain realized upon the transaction, shall be
(a) its cost, reduced by
(b) the portion of the total gain realized which was not recognized. To the extent that section prevents the purchase of stock from resulting in nonrecognition of gain, the basis of purchased stock is its cost.
(iii) If purchased property consists of both section property and other property, the total basis computed under subdivision (ii) of this subparagraph shall be allocated between the section property (treated as a class) and the other property (treated as a class) in proportion to their respective costs, except that for purposes of this subdivision (but not subdivision (iv) of this subparagraph) the cost of the section property shall be deemed to be the excess of
(a) its actual cost, over
(b) the gain not taken into account under section by reason of the application of section .
(iv) If the property acquired consists of more than one item of section property (or of more than one item of other property), the total basis of the section property (or of the other property), as computed under subdivisions (ii) and (iii) of this subparagraph, shall be allocated to each item of section property (or other property) in proportion to their respective actual costs.
(v) The provisions of this subparagraph may be illustrated by the following examples:
Example 1.
Assume the same facts as in the example in subparagraph (1)(iv) of this paragraph. Assume further that the portion of the gain realized which was not recognized under section or upon the transaction is $60,000, of which the gain computed under section which is not taken into account by reason of the application of section is $10,000, that is, the excess of the gain which would have been recognized under section if section did not apply ($16,000) over the gain recognized under section ($6,000). In such example $95,000 of proceeds were used to purchase property in acquisitions qualifying under section of which $42,000 was for section property, $48,000 for land, and $5,000 for stock in a corporation. The basis of each acquired property is determined in the following manner:
(a) Under subdivision (ii) of this subparagraph, the total basis of the acquired properties (other than the stock) is $30,000, that is, their cost ($90,000, of which $42,000 is for section property and $48,000 is for land), reduced by the portion of the total gain realized which was not recognized ($60,000).
(b) Under subdivision (iii) of this subparagraph, such total basis is allocated between the section property and the land in proportion to their respective costs, and for this purpose the cost of the section property is considered to be $32,000, that is, its actual cost ($42,000) minus the gain not recognized under section by reason of the application of section ($10,000). Thus, the basis of the section property is $12,000 (32/80 of $30,000), and the basis of the land is $18,000 (48/80 of $30,000).
(c) The basis of the purchased stock is its cost of $5,000. See last sentence of subdivision (ii) of this subparagraph.
Example 2.
Assume the same facts as in example (1) except that the section property purchased for $42,000 consists of 2 items of such property ($10,500 for C, and $31,500 for D), and that the land purchased for $48,000 consists of 2 pieces of land ($12,000 for X, and $36,000 for Y). Under subdivision (iv) of this subparagraph, the total basis for each class of property is allocated between the individual properties of such class in proportion to their respective actual costs. Thus, the total basis of $12,000, as determined in example (1), for the section property is allocated as follows:
| To C: $12,000 × ($10,500/$42,000) | $3,000 |
| To D: $12,000 × ($31,500/$42,000) | 9,000 |
| Total | 12,000 |
The total basis of $18,000, as determined in example (1), for the land is allocated as follows:
| To X: $18,000 × ($12,000/$48,000) | $4,500 |
| To Y: $18,000 × ($36,000/$48,000) | 13,500 |
| Total | 18,000 |
(3) Basis of property acquired upon involuntary conversion into similar property If property is involuntarily converted into property similar or related in service or use in a transaction to which section applies, and if by reason of the application of section all or part of the gain computed under section is not taken into account, then:
(i) The total basis of the acquired property shall be determined under the first sentence of section , and
(ii) If more than one item of property is acquired, such total basis shall be allocated to the individual items of property acquired in accordance with the principles prescribed in subparagraph (2) (iii) and (iv) of this paragraph, except that an amount equivalent to the fair market value of each item of property on the date acquired shall be treated as its actual cost.
(4) Basis of property acquired in like kind exchange If section property is transferred in an exchange described in section (a) or (b), and if by reason of the application of section all or part of the gain computed under section is not taken into account, then:
(i) The total basis of the property (including nonsection 1250 property) acquired of the type permitted to be received under section without recognition of gain or loss shall be determined under section , and
(ii) If more than one item of property of such type was received, such total basis shall be allocated to the individual items of property of such type in accordance with the principles prescribed in subparagraph (2) (iii) and (iv) of this paragraph, except that an amount equivalent to the fair market value of each such item of property on the date received shall be treated as its actual cost.
(5) Additional depreciation for property acquired in like kind exchange or involuntary conversion
(i) If property is disposed of in a transaction described in section or , and if by reason of the application of section all or part of the gain computed under section is not taken into account, then the additional depreciation for the acquired property immediately after the transaction (as computed under section ) shall be an amount equal to the amount of gain computed under section which was not taken into account by reason of the application of section .
(ii) In case more than one item of section property is acquired in the transaction, the additional depreciation computed under subdivision (i) of this subparagraph shall be allocated to each such item of section property in proportion to their respective adjusted bases.
(iii) The provisions of this subparagraph may be illustrated by the following examples:
Example 1.
(a) On January 15, 1969, section property X is condemned and proceeds of $100,000 are received. On such date, X's adjusted basis is $25,000, the additional depreciation is $10,000, and the applicable percentage under section is 70 percent. Since the additional depreciation ($10,000) is less than the gain realized ($75,000, that is, $100,000 minus $25,000) the amount of gain computed under section (without regard to section ) is $7,000, that is, 70 percent of $10,000.
(b) On March 1, 1969, all the proceeds are used to purchase section property Y in a transaction qualifying under section for nonrecognition of gain. Accordingly, the gain not recognized by reason of the application of section is $75,000, of which $7,000 is gain computed under section which is not taken into account by reason of the application of section . See subparagraph (1) of this paragraph.
(c) Immediately after the transaction, Y's basis is $25,000, that is, its cost ($100,000) minus the total gain realized which was not recognized ($75,000), and the additional depreciation (as computed under section ) is $7,000, that is, the amount of gain not taken into account under section by reason of the application of section .
(d) On December 15, 1969, before any depreciation deductions were allowed or allowable in respect of Y, Y is sold for $90,000. Under section , the holding period of Y is 9 months, and thus, under section , the applicable percentage is 100 percent. Since the additional depreciation ($7,000) is less than the gain realized ($65,000, that is $90,000 minus $25,000), the amount of gain recognized under section as ordinary income is $7,000, that is, 100 percent of $7,000.
Example 2. Assume the same facts as in example (1), except that property Y was purchased on June 15, 1962, and that 90 full months thereafter, or December 15, 1969, it is sold for $35,000. Thus the applicable percentage under section is 30 percent. Assume further that at the time of such sale Y's adjusted basis is $5,000 and additional depreciation in respect of Y for periods after it was acquired is $2,500. Thus, the additional depreciation at the time of the sale is $9,500, that is, the sum of the additional depreciation in respect of Y attributable to X as computed under section in (c) of example (1) ($7,000), plus the additional depreciation attributable to periods after Y was acquired ($2,500). Since the additional depreciation ($9,500) is less than the gain realized ($30,000, that is, $35,000 minus $5,000), the gain recognized under section as ordinary income is $2,850, that is, 30 percent of $9,500.
(6) Single disposition of section 1250 property and property of different class
(i) For purposes of this subparagraph:
(a) Section property, section property (as defined in section ), and other property shall each be treated as a separate class of property, and
(b) The term qualifying property means property which may be acquired without recognition of gain under the applicable provision of section or (applied without regard to section or ) upon the disposition of property.
(ii) If upon a sale of section property gain would be recognized under section and if such section property together with property of a different class or classes are disposed of in one transaction in which gain is not recognized in whole or in part under section or (without regard to sections and ), then:
(a) The total amount realized shall be allocated between the different classes of property disposed of in proportion to their respective fair market values,
(b) The amount realized upon the disposition of property of a class shall be deemed to consist of so much of the fair market value of qualifying property of the same class acquired as is not in excess of the amount realized from the property of such class disposed of,
(c) The remaining portion (if any) of the amount realized upon the disposition of property of such class shall be deemed to consist of so much of the fair market value of any other property acquired as is not in excess of such remaining portion, and
(d) For purposes of applying (c) of this subdivision, the fair market value of acquired property shall be taken into account only once and in such manner as the taxpayer determines.
(iii) The amounts determined under this subparagraph in respect of property shall apply for all purposes of the Code.
(iv) The application of this subparagraph may be illustrated by the following example:
Example:
(a) Green owns property consisting of land and a fully equipped factory building thereon. The property is condemned and proceeds of $100,000 are received. If the property were sold for $100,000, gain of $40,000 would be recognized of which $10,000 would be recognized as ordinary income under section . Proceeds of $95,000 are used to purchase property similar or related in service or use to the condemned property and under section (without regard to sections and ) recognition of gain is limited to $5,000. The fair market values by classes of the property disposed of, and of the property acquired, are summarized in the table below:
| Fair market value of property | Disposed of | Acquired | |
|---|---|---|---|
| Section 1245 property | $35,000 | $55,000 | |
| Section 1250 property | 45,000 | 28,000 | |
| Land | 20,000 | 12,000 | |
| Cash | 5,000 | ||
| 100,000 | 100,000 |
(b) The allocations under subdivision (ii) of this subparagraph are summarized in the table below:
| Property disposed of | Property acquired | CashRemaining | Sec. 1245 Property | Sec. 1250 Property | Land |
|---|---|---|---|---|---|
| $35,000 of section 1245 property | $35,000 | ||||
| $45,000 of section 1250 property | 1 17,000 | $28,000 | |||
| $20,000 of land | 1 3,000 | $12,000 | 1 $5,000 | ||
| Total | 55,000 | 28,000 | 12,000 | 5,000 | |
| 1 Determined by taxpayer pursuant to subdivision (ii)(d) of this subparagraph. |
(c) Upon the disposition of the section property, only section property is acquired, and thus gain (if any) would not be recognized under section . See section . Upon the disposition of the section property gain under section would not be recognized by reason of the application of section . See subparagraph (1) of this paragraph. If the gain realized on the disposition of the land is not less than $5,000, then under section the gain recognized would be $5,000, that is, an amount equal to the portion of the proceeds from the disposition of the land ($5,000) not invested in qualifying property.
(7) Disposition of portion of property A disposition described in section of a portion of an item of property gives rise to an addition to capital account described in the last sentence of (relating to property with 2 or more elements). If the addition to capital account is a separate improvement within the meaning of , and thus an element, then immediately after the addition is made the amount of additional depreciation for such separate improvement shall be computed under subparagraph (5) of this paragraph by treating such portion and such addition as separate properties. If the addition is not a separate improvement, then immediately after the addition is made such property is considered under as having a special element with the same amount of additional depreciation so computed. For purposes of computing applicable percentage, the holding period of the separate improvement or special element (as the case may be), which is determined under section , does not include the holding period of the property disposed of.
(e) Sections 1071 and 1081 transactions
(1) General This paragraph prescribes regulations under section which apply in the case of a disposition of section property in a transaction in which gain (determined without regard to section ) is not recognized in whole or in part by reason of the application of section (relating to gain from sale or exchange to effectuate policies of FCC) or section 1081 (relating to gain from sale or exchange in obedience to order of SEC).
(2) Involuntary conversion treatment under section 1071 If section property is disposed of and gain (determined without regard to section ) is not recognized in whole or in part solely by reason of an election under the first sentence of section to treat the transaction as an involuntary conversion, the consequences of the transaction shall be determined under the principles of of this section.
(3) Basis reduction under sections 1071 or 1082(a)(2)
(i) If section property is disposed of and gain (determined without regard to section ) is not recognized in whole or in part by reason of a reduction in basis of property pursuant to an election under section or the application of section 1082(a)(2), then the amount of gain taken into account by the transferor under section shall not exceed the sum of:
(a) The amount of gain recognized on such disposition (determined without regard to section ), plus
(b) In case involuntary conversion treatment was also elected under section , an amount equal to the cost of any stock purchased in a corporation which (without regard to section ) would result in nonrecognition of gain under section , as modified by section , plus
(c) The portion of the gain computed under section (without regard to this paragraph) which is neither taken into account under (a) or (b) of this subdivision nor applied under subdivision (ii) of this subparagraph to reduce the basis of section property.
(ii)
(a) The amount of gain computed under section (without regard to this paragraph) which is not taken into account under subdivision (i) (a) or (b) of this subparagraph shall be applied to the amount by which the basis of the section property was reduced under section or 1082(a)(2), as the case may be, before other gain (which is not gain computed under section ) is so applied.
(b) If the basis of more than one item of section property was so reduced, the gain applied under (a) of this subdivision to all such section properties shall be applied to such items in proportion to the amounts of their respective basis reductions.
(c) Any gain not applied under (a) of this subdivision shall be applied to the amount by which the basis of the nonsection 1250 property was reduced.
(iii) If gain computed under section is applied under subdivision (ii) of this subparagraph to reduce the basis of section property, the amount so applied shall be treated as additional depreciation in respect of such section property. For treatment of such section property as having a special element with additional depreciation consisting of such amount, see . For purposes of computing applicable percentage, such special element shall have a holding period beginning on the day after the date as of which the property's basis was so reduced.
(4) Section 1081(d)(1)(A) transaction No gain shall be recognized under section upon an exchange of property as to which gain is not recognized (without regard to section ) because of the application of section 1081(d)(1)(A) (relating to transfers within system group). For treatment of property in the hands of a transferee, the principles of of this section shall apply.
(f) Property distributed by a partnership to a partner
(1) General For purposes of section (d)(3) and (e)(2), the basis of section property distributed by a partnership to a partner shall be determined by reference to the adjusted basis of such property to the partnership. Thus, if section applies to a distribution of section property by a partnership to a partner, then even though the partner's basis is not determined for other purposes by reference to the partnership's basis,
(i) the amount of gain taken into account by the partnership under section is limited by section to the amount of gain recognized to the partnership upon the distribution (determined without regard to section ), and
(ii) the holding period of the property in the hands of the partner shall, under section , include the holding period of the property in the hands of the partnership. For nonapplication of section to a disposition to an organization (other than a cooperative described in section ) which is exempt from the tax imposed by chapter 1 of the Code, see of this section.
(2) Treatment of property distributed by partnership
(i) If section property is distributed by a partnership to a partner in a distribution in which no part of the partnership's potential section income in respect of the property was recognized as ordinary income to the partnership under , the additional depreciation for the property in the hands of the distributee attributable to periods before the distribution shall be an amount equal to the total potential section income of the partnership in respect of the property immediately before the distribution, recomputed as if the applicable percentage for the property had been 100 percent. Under , the potential section income is, in effect, the gain to which section would have applied if the property had been sold by the partnership immediately before the distribution at its fair market value at such time.
(ii) If upon the distribution any potential section income in respect of the property was recognized to the partnership under , then after the distribution the additional depreciation shall be an amount equal to
(a) the total potential section income in respect of the property, as recomputed in subdivision (i) of this subparagraph, minus
(b) the amount of potential section income which would have been recognized to the partnership under if the applicable percentage for the property had been 100 percent.
(iii) If the partner's basis for the property immediately after the transaction exceeds the partnership's adjusted basis for the property immediately before the transaction, the excess may be an addition to capital account under (relating to property with two or more elements).
(3) Examples The provisions of subparagraphs (1) and (2) of this paragraph may be illustrated by the following examples:
Example 1.
(i) A partnership distributes a building to Smith on January 1, 1969, in a complete liquidation of his partnership interest to which section does not apply. On the date of the distribution, the partnership's holding period for the property is 40 full months and, accordingly, the applicable percentage under section is 80 percent. On such date, the partnership's additional depreciation for the building ($6,250) is lower than the excess ($40,000) of its fair market value ($140,000) over adjusted basis ($100,000). Thus, under , the partnership's potential section income in respect of the building is $5,000 (80 percent of $6,250). Assume that section does not apply to the distribution. Accordingly, no gain would be recognized to the partnership under section (without regard to the application of section ). Smith's basis for his partnership interest was $150,000, and under section Smith's basis for the building is equal to his basis for his partnership interest. Thus, Smith's basis for the building is not determined by reference to the partnership's basis for the building. Nevertheless, under subparagraph (1) of this paragraph, no gain is recognized to the partnership under section and Smith's holding period for the property includes the partnership's holding period.
(ii) Six full months after Smith received the building in the distribution, or July 1, 1969, he sells it for $153,000. Assume that no depreciation was allowed or allowable to Smith for the building, and that the special rules under for property with two or more elements do not apply. Since Smith's holding period for the building includes its holding period in the hands of the partnership, his holding period is 46 full months (40 full months for the partnership plus 6 full months for Smith) and the applicable percentage under section is 74 percent.
(iii) Since no potential section income was recognized to the partnership under , the additional depreciation for the building attributable to periods before the distribution is determined under the provisions of subparagraph (2)(i) of this paragraph. Under such provisions, the potential section income to the partnership, which was actually $5,000 (that is, 80 percent of $6,250), is recomputed as if the applicable percentage were 100 percent, and thus such additional depreciation is $6,250 (that is, 100 percent of $6,250). Since no depreciation was allowed or allowable for the building in Smith's hands, the additional depreciation for the building attributable to Smith's total holding period (46 full months) is $6,250. Since the gain realized ($3,000, that is, amount realized, $153,000, minus adjusted basis, $150,000), is lower than the additional depreciation ($6,250), the gain recognized to Smith under section is $2,220 (that is, 74 percent of $3,000).
Example 2. Assume the facts as in example (1) except that as a result of the distribution the partnership recognizes under potential section income of $1,000 (that is, 80 percent of $1,250). The additional depreciation attributable to periods before the distribution, as determined under the provisions of subparagraph (2)(ii) of this paragraph, is $5,000, that is,
(a) the total potential section income in respect of the property, recomputed in example (1) as if the applicable percentage were 100 percent ($6,250), minus
(b) the amount of potential section income which would have been recognized to the partnership under if the applicable percentage for the property had been 100 percent ($1,250, that is, 100 percent of $1,250).
(4) Treatment of partnership property after certain transactions If under (relating to certain distributions of partnership property other than section property treated as sales or exchanges) a partnership is treated as purchasing section property (or a portion thereof) from a distributee who relinquishes his interest in such property (or portion), then after the date of such purchase the following rules shall apply:
(i) If only a portion of the property is treated as purchased, there shall be excluded from the additional depreciation for the remaining portion any additional depreciation in respect of the purchased portion for periods before such purchase.
(ii) In respect of the purchased property (or portion),
(a) as of the date of purchase the amount of additional depreciation shall be zero, and
(b) for purposes of computing applicable percentage the holding period shall begin on the day after the date of such purchase.
(5) Cross reference See for the amount of additional depreciation for partnership property in respect of a partner who acquired his partnership interest in certain transactions when an election under section (relating to optional adjustments to basis of partnership property) was in effect.
(g) Disposition of principal residence
(1) In general
(i) Section provides that section shall not apply to a disposition of property by a taxpayer to the extent the property is used by the taxpayer as his principal residence (within the meaning of section and the regulations thereunder, relating to a sale or exchange of residence). Thus, for example, if a doctor sells a house, of which one portion was used as his principal residence within the meaning of section and the other portion was properly subject to the allowance for depreciation as property used in his trade or business, then, by reason of the application of section , section does not apply in respect of the disposition of the portion used as his principal residence. The provisions of this subparagraph shall apply regardless of whether section applies. Thus, for example, if section did not apply to the sale because the doctor did not invest in a new principal residence within the period specified in section , nevertheless section would not apply to the disposition of the portion used as a principal residence.
(ii) Section provides that section shall not apply to a disposition of section property by a taxpayer who, in respect of the property, satisfies the age and ownership requirements of section (relating to exclusion from gross income of gain on sale or exchange of residence of individual who has attained age 65), but only to the extent the taxpayer satisfies the use requirements of section in respect of such property. Thus, if a taxpayer has attained the age of 65 before the date on which he disposes of section property, and if during the 8-year period ending on the date of the disposition the property has been owned and used by the taxpayer solely as his principal residence for periods aggregating 5 years or more, then section does not apply in respect to the disposition. This result would not be changed even if the taxpayer does not or cannot make the election provided for in section and even if section applies to only a portion of the gain because the adjusted sales price exceeds the $20,000 limitation in section . If, however, only a portion of the property has been used as his principal residence for such periods aggregating 5 years or more, then, by reason of the application of section , section is inapplicable only to the portion so used. For special rules for determining whether the age, ownership, and use requirements of section are treated as satisfied, and for the manner of applying such requirements, see section and the regulations thereunder.
(2) Concurrent operation of section 1250(d)(7) with other provisions Upon the disposition of a principal residence, gain computed under section may not be recognized in whole or in part by reason of the application of both the provisions of section and the provisions of one of the other exceptions or limitations enumerated in section . Thus, for example, if an entire house is transferred as a gift, and if section applies to only a portion of the house, then section excepts the disposition of the entire house from the application of section .
(3) Special rule If by reason of section a disposition is partially excepted from the application of section , and if no other paragraph of section excepts the disposition entirely from such application, then the gain to which section applies shall be an amount which bears the same ratio to
(i) the gain computed under section (without regard to section ), as
(ii) the fair market value of the portion of the property to which the exception in section does not apply, bears to
(iii) the total fair market value of the property. Thus, for example, if under of this section gain of $300 would be recognized as ordinary income under section (without regard to section ) upon a combined sale and gift of section property, and if the property has a fair market value of $25,000 of which $10,000 is properly allocable to a portion not used as a principal residence, then the amount of gain recognized as ordinary income under section would be $120 (10/25 of $300).
(4) Treatment of property in hands of transferee If property is disposed of in a transaction to which section applies, and if its basis in the hands of the transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section (relating to gifts) or section (relating to certain tax-free transactions), then the treatment of the property in the hands of the transferee shall be determined under paragraph (a)(3) or (c)(3) (whichever is applicable) of this section
(5) Treatment of property acquired in like kind exchange or involuntary conversion If property is disposed of in a transaction to which section (relating to principal residence) and section (relating to like kind exchanges and involuntary conversions) apply, then:
(i) The basis of the property acquired shall be determined under the applicable provisions of , , or of this section, applied as if all gain computed under section (except any gain not recognized solely by reason of the application of section ) were not taken into account by reason of section ,
(ii) The additional depreciation for the property acquired shall be determined in the manner prescribed in of this section, so applied, and
(iii) For purposes of computing the applicable percentage, the holding period of the acquired property shall be determined under section .
(6) Treatment of property acquired in section 1034 transaction If a principal residence is disposed of in a transaction to which section applies, and if by reason of the application of section (relating to sale or exchange of residence) the basis of property acquired in the transaction is determined by reference to the basis in the hands of the taxpayer of the property disposed of, then:
(i) The additional depreciation for the acquired property immediately after the transaction shall be an amount equal to
(a) the amount of the additional depreciation for the property disposed of, minus
(b) the amount of any gain which would have been taken into account under section by the transferor upon the disposition if the applicable percentage for the property had been 100 percent,
(ii) For purposes of computing the applicable percentage, the holding period of the acquired property includes the holding period of the disposed of property (see section ),
(iii) If the adjusted basis of the acquired property exceeds the adjusted basis immediately before the transfer of the property disposed of, the excess is an addition to capital account under (relating to property with more than one element), and
(iv) If the property disposed of consisted of two or more elements within the meaning of , see for the amount of additional depreciation and the holding period for each element in the hands of the transferee.
(h) Limitation for disposition of qualified low-income housing
(1) Limitation on gain
(i) Under section , if section property is disposed of and gain (determined without regard to section ) is not recognized in whole or in part under section (relating to certain sales of low-income housing projects), then the amount of gain recognized by the transferor under section shall not exceed the greater of:
(a) The amount of gain recognized under section (determined without regard to section ), or
(b) The excess, if any, of the amount of gain which would, but for section , be taken into account under section , over the cost of the section property acquired in the transaction.
For purposes of this paragraph the term qualified housing project, approved disposition, reinvestment period, and net amount realized shall have the same meaning as in section and .
(ii) The principles of this subparagraph may be illustrated by the following examples:
Example 1.
(i) Taxpayer A owns a qualified housing project and makes an approved disposition of the project on January 1, 1971. The net amount realized upon the disposition is $550,000, of which $475,000 is attributable to section property. The adjusted basis of the section property is $250,000 and the gain realized on the disposition of section property is $225,000. The additional depreciation for the property is $100,000, the applicable percentage is 48 percent, and if section did not apply to the disposition, $48,000 of gain would be recognized under section . Within the reinvestment period, A purchases a replacement qualified housing project at a cost of $525,000, of which $425,000 is attributable to section property. A properly elects under section and the regulations thereunder to limit the recognition of gain (determined without regard to section ) to $25,000, that is, the excess of the net amount realized ($550,000) over the cost of the replacement housing project ($525,000).
(ii) The amount of gain recognized under section is limited to $25,000, that is, the greater of (a) the amount of gain recognized without regard to section ($25,000), or (b) the excess of (1) the amount of gain which would be taken into account under section if section did not apply ($225,000), over (2) the cost of the replacement section property ($425,000), or zero.
Example 2. The facts are the same as in example (1) except that only $180,000 of the cost of the replacement housing project is attributable to section property. Thus, the gain recognized under section is limited to $45,000, the greater of
(a) the excess of
(1) the amount of gain which would be taken into account under section if section did not apply ($225,000), over
(2) the cost of the replacement section property ($180,000), or
(b) the amount of gain recognized without regard to section ($25,000).
(2) Replacement project consisting of more than one element
(i) If
(a) section property is disposed of,
(b) any portion of the gain which would have been recognized under section is not recognized by reason of section , and
(c) the cost of the replacement section property constructed, reconstructed, or acquired during the reinvestment period exceeds the net amount realized attributable to the section property disposed of, then the section property shall consist of two elements. For purposes of this paragraph, the reinvestment element is that portion of the section property constructed, reconstructed, or acquired during the reinvestment period the cost of which does not exceed the net amount realized attributable to the section property disposed of, reduced by any gain recognized with respect to such property. The additional cost element is that portion of the section property constructed, reconstructed, or acquired during the reinvestment period whose cost exceeds the net amount realized attributable to the section property disposed of.
(ii) The principles of this subparagraph may be illustrated by the following example:
Example 1.
(i) Taxpayer B disposes of a qualified housing project consisting of section property with an adjusted basis of $500,000 and land with a basis of $100,000. The amount realized on the disposition is $750,000 of which $650,000 is attributable to the section property. B constructs a replacement housing project at a cost of $1,000,000 of which $850,000 is attributable to section property. B elects in accordance with the provisions of section and the regulations there under not to recognize the $150,000 gain realized.
(ii) Under section no gain is recognized under section . The replacement section property consists of the two elements. The reinvestment element has a cost of $650,000, i.e., that portion of the replacement section property the cost of which does not exceed the amount realized attributable to the section property disposed of ($650,000), reduced by any gain recognized with respect to such property (zero). The additional cost element has a cost of $200,000, that is, the excess of the cost of the replacement section property ($850,000) over the amount realized attributable to the section property disposed of ($650,000).
(3) Basis of property acquired
(i) If section property is disposed of and gain (determined without regard to section ) is not recognized in whole or in part under section (relating to certain sales of low-income housing projects), then the basis of the section property and other property acquired in the transaction shall be determined in accordance with the rules of this subparagraph. Generally, the basis of the property acquired in a transaction to which section applies is its cost reduced by the amount of any gain not recognized attributable to the property disposed of (see section ). In a case where the replacement section property constructed, reconstructed, or acquired within the reinvestment period is treated as consisting of more than one element under section , the aggregate basis of the property determined under section shall be allocated as follows: first, to the reinvestment element of the section property, in an amount equal to the amount determined under section reduced by the amount of any gain not recognized attributable to the section property disposed of; second, to the other replacement property (other than section property) in an amount equal to the amount of its cost reduced (but not below zero) by any remaining amount of gain not recognized; and finally, to the additional cost element of the section property, in an amount equal to the amount determined under section reduced by any amount of gain not recognized which has not been taken into account in determining the basis of the reinvestment element and the other replacement property that is not section property. See of this section for definition of the terms reinvestment element and additional cost element.
(ii) The principles of this subparagraph may be illustrated by the following examples:
Example 1. The facts are the same as in example (1) of subparagraph (1)(ii) of this paragraph. The basis of the replacement section property is $225,000, the amount of the reinvestment element ($425,000) minus the gain not recognized attributable to the section property disposed of ($200,000).
Example 2. Taxpayer C disposes of a qualified housing project on January 1, 1971. The adjusted basis for the project is $3,800,000, of which $3,000,000 is attributable to section property and $800,000 is attributable to land. The amount realized on the disposition is $5,000,000, of which $4,000,000 is attributable to the section property and $1,000,000 is attributable to the land. The gain realized upon the disposition is $1,200,000, that is, amount realized ($5,000,000) minus adjusted basis ($3,800,000), of which $1,000,000 is attributable to the section property disposed of. Within the reinvestment period, C purchases another qualified housing project at a cost of $5,500,000, of which $4,000,000 is attributable to section property and $1,500,000 is attributable to other property. C makes an election under section and the regulations thereunder and none of the $1,200,000 gain realized on the disposition is recognized (determined without regard to section ). Under section , none of the gain realized is recognized under section . The basis of the replacement section property is $3,000,000, that is, the amount of the reinvestment element ($4,000,000) less the amount of gain not recognized attributable to section property disposed of ($1,000,000). The basis of the other property acquired is $1,300,000, that is, its cost ($1,500,000) reduced by the remaining gain not recognized ($200,000).
Example 3. The facts are the same as in example (2) except that the cost of the replacement section property is $4,500,000 and the cost of the other property is $1,000,000. Thus, the replacement section property consists of two elements under section . The reinvestment element (section ) has a basis of $3,000,000, that is $4,000,000 (that portion of the section property acquired the cost of which does not exceed the net amount realized attributable to the section property disposed of), reduced by $1,000,000 (the gain not recognized attributable to the section property disposed of). The basis of the other property is $800,000, that is, its cost ($1,000,000) reduced by the remaining gain not recognized ($200,000). The additional cost element (section ) has a basis of $500,000, that is, the portion of the section property acquired the cost of which exceeds the net amount realized attributable to the section property disposed of. This amount ($500,000) is not reduced by any amount of gain not recognized because all of the gain not recognized has already been taken into account in determining the basis of the reinvestment element and the other replacement property that is not section property.
(4) Additional depreciation for property acquired
(i) If a qualified housing project is disposed of in a transaction to which section applies, the additional depreciation for the replacement property immediately after the transaction shall be an amount equal to
(a) the amount of additional depreciation for the property disposed of, minus
(b) the amount of additional depreciation necessary to produce the amount of gain recognized under section . Thus, if no gain is recognized upon a disposition of a qualified housing project, the additional depreciation for the property acquired will be the same as for the property disposed of. On the other hand, if upon disposition of a project, gain of $40,000 was recognized under section , and if the additional depreciation for the project and the applicable percentage were $100,000 and 80 percent, respectively, the additional depreciation for the replacement housing project would be $50,000, that is, $100,000 minus $50,000, the amount of additional depreciation necessary to produce $40,000 of recognized gain where the applicable percentage is 80 percent.
(ii) If the property acquired in the transaction consists of more than one element of section property by reason of section , the additional depreciation under subdivision (i) of this subparagraph shall be allocated solely to the reinvestment element.
(5) Additional limitation If, in a transaction to which section applies, gain is recognized by the taxpayer, the amount of gain recognized which is attributable to section property disposed of is, under section , limited to an amount equal to the net amount realized attributable to the section property disposed of reduced by the greater of (i) the adjusted basis of the section property disposed of, or (ii) the cost of the section property acquired. The limitation of section may be illustrated by the following example:
Example: Taxpayer D owns property constituting a qualified housing project under section . In an approved disposition, the project is sold for $225,000. The net amount realized on the disposition is $225,000 of which $175,000 is attributable to the section property disposed of. The adjusted basis of such property is $150,000 and thus the gain realized upon the disposition of the section property is $25,000. Assume that the total gain realized upon disposition of the project is $45,000. Within the reinvestment period, D purchases another qualified housing project at a cost of $200,000, of which $160,000 is attributable to section property. D elects, in accordance with section and the regulations thereunder, to limit the recognition of gain to $25,000, that is, the net amount realized ($225,000), minus the cost of the replacement housing project ($200,000). Under this subparagraph, $15,000 of the $25,000 gain recognized is attributable to the section property disposed of, that is, the net amount realized attributable to the section property disposed of ($175,000), reduced by $160,000, the greater of the adjusted basis of the section property disposed of ($150,000) or the cost of the section property acquired ($160,000).
(6) Allocation rule
(i) If, in a transaction to which of this section applies, the section property disposed of is treated as consisting of more than one element by reason of the application of section with respect to a prior transaction, then the amount of gain recognized, the net amount realized, and the additional depreciation with respect to each such element shall be allocated to the elements of the replacement section property in accordance with the provisions of this subparagraph.
(ii) The portion of the net amount realized upon such a disposition which shall be allocated to each element of the section property disposed of is that amount which bears the same ratio to the net amount realized attributable to all the section property disposed of in the transaction as the additional depreciation for that element bears to the total additional depreciation for all elements disposed of. If any gain is recognized upon disposition of the section property, such gain shall be allocated to each element in the same proportion as the gain realized for that element bears to the gain realized for all elements disposed of. The additional depreciation for each reinvestment element of the replacement section property shall be the same as for the corresponding element of the property disposed of, decreased by the amount of additional depreciation necessary to produce the amount of gain recognized for such element. The additional depreciation for any additional cost element shall be zero.
(iii) The principles of this subparagraph may be illustrated by the following example:
Example: Taxpayer E disposes of a qualified housing project in an approved disposition. The net amount realized is $1,090,000 of which $900,000 is attributable to section property. The section property consists of (1) a reinvestment element with an adjusted basis of $300,000, additional depreciation of $100,000, and an applicable percentage of 50 percent, and (2) an additional cost element with an adjusted basis of $200,000, additional depreciation of $50,000, and an applicable percentage of 80 percent. Gain of $400,000 is realized on the disposition of the section property, that is, amount realized ($900,000) minus adjusted basis ($500,000). Within the reinvestment period, E purchases another qualified housing project at a cost of $1,000,000 of which $840,000 is attributable to section property. E elects, in accordance with section and the regulations thereunder, to limit recognition of gain (determined without regard to section ) to $90,000, that is, the excess of the net amount realized ($1,090,000) over the cost of the replacement project ($1,000,000). Under section , the amount of gain recognized under section is limited to $90,000 (see subparagraph (1) of this paragraph). Under section and this subparagraph, $600,000 of the $900,000 net amount realized attributable to the section property is allocated to the reinvestment element, that is, additional depreciation for the element ($100,000) over total additional depreciation ($150,000) times the net amount realized ($900,000). The remaining $300,000 is allocated to the additional cost element. Thus, the gain realized attributable to the reinvestment element is $300,000, that is, net amount realized ($600,000) minus adjusted basis ($300,000). The gain realized attributable to the additional cost element is $100,000, that is, net amount realized ($300,000) minus adjusted basis ($200,000). Under subparagraph (5) of this paragraph, the gain recognized attributable to the section property is limited to $60,000, that is, the net amount realized attributable to the section property disposed of ($900,000) minus the greater of the adjusted basis of such property ($500,000) or the cost of the section property acquired in the transaction ($840,000). Under section and this subparagraph, $45,000 of the $60,000 gain recognized is attributable to the reinvestment element, that is, $60,000 multiplied by a fraction whose numerator is the gain realized attributable to the reinvestment element ($300,000) and whose denominator is the total gain realized attributable to all the section property ($400,000). The remaining $15,000 of the gain recognized is attributable to the additional cost element. The new property acquired has no additional cost element. The reinvestment element of the new property acquired consists of 2 subelements corresponding to the reinvestment element and additional cost element of the property disposed of. The subelement corresponding to the reinvestment element has additional depreciation of $10,000, that is, its additional depreciation immediately before the disposition ($100,000), minus $90,000, the amount of additional depreciation necessary to produce $45,000 of section gain where the applicable percentage is 50 percent. The subelement corresponding to the additional cost element has additional depreciation of $31,250, that is, its additional depreciation immediately before the disposition ($50,000), minus $18,750, the amount of additional depreciation necessary to produce $15,000 of section gain where the applicable percentage is 80 percent.
[T.D. 7084, 36 FR 275, Jan. 8, 1971, as amended by T.D. 7193, 37 FR 12957, June 30, 1972; T.D. 7400, 41 FR 5101, Feb. 4, 1976; 41 FR 7095, Feb. 17, 1976]