Reg. § 1.1252-2 Special rules.
(a) Exception for gifts
(1) General rule In general, no gain shall be recognized under section upon a disposition of farm land by gift. For purposes of section and this paragraph, the term gift shall have the same meaning as in and, with respect to the application of this paragraph, principles illustrated by the examples of shall apply. For reduction in amount of charitable contribution in case of a gift of farm land, see section and .
(2) Disposition in part a sale or exchange and in part a gift Where a disposition of farm land is in part a sale or exchange and in part a gift, the amount of gain which shall be recognized as ordinary income under section shall be computed under , applied by treating the gain realized (for purposes of ) as the excess of the amount realized over the adjusted basis of the farm land.
(3) Treatment of farm land in hands of transferee See of this section for treatment of the transferee in the case of a disposition to which this paragraph applies.
(4) Examples The provisions of this paragraph may be illustrated by the following examples:
Example 1. On March 2, 1976, A, a calendar year taxpayer, makes a gift to B of a parcel of land having an adjusted basis of $40,000, a fair market value of $65,000, and a holding period of 6 years (A, having purchased the land on January 15, 1971). On the date of such gift, the aggregate of the deductions allowed to A under sections and with respect to the land is $24,000 with $21,000 of such amount attributable to 1971. Upon making the gift, A recognizes no gain under section or section . See and subparagraph 1 of this paragraph. For treatment of the farm land in the hands of B, see example (1) of of this section. For effect of the gift on the excess deductions accounts of A and of B, see .
Example 2.
(i) Assume the same facts as in example (1), except that A transfers the land to B for $50,000. Thus, the gain realized is $10,000 (amount realized, $50,000, minus adjusted basis, $40,000), and A has made a gift of $15,000 (fair market value, $65,000, minus amount realized, $50,000).
(ii) Upon the transfer of the land to B, A recognizes $3,000 of gain under section . See example (2) of . Thus, A recognizes $7,000 as ordinary income under section , computed under subparagraph (2) of this paragraph as follows:
| (1) Aggregate of deductions allowed under sections 175 and 182 | $24,000 |
| (2) Minus: Gain recognized as ordinary income under section 1251(c)(1) | $3,000 |
| (3) Difference | $21,000 |
| (4) Multiply: Applicable percentage for land disposed of within sixth year after it was acquired | 80% |
| (5) Amount in paragraph (a)(1)(i)(a) of § 1.1252-1 | $16,800 |
| (6) Gain realized (see subdivision (i) of this example) | $10,000 |
| (7) Minus: Amount in line (2) | $3,000 |
| (8) Amount in paragraph (a)(1)(i)(b) of § 1.1252-1, applied in accordance with subparagraph (2) of this paragraph | $7,000 |
| (9) Lower of line (5) or line (8) | $7,000 |
Thus, the entire gain realized on the transfer, $10,000, is recognized as ordinary income since that amount is equal to the sum of the gain recognized as ordinary income under section , $3,000, and under section , $7,000. For treatment of the farm land in the hands of B, see example (2) of of this section.
(b) Exception for transfers at death
(1) In general 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 section and this paragraph, the term transfer at death shall have the same meaning as in and, with respect to the application of this paragraph, principles illustrated by the examples of shall apply.
(2) Treatment of farm land in hands of transferee If as of the date a person acquires farm land 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 alternative valuation date), then on such date the aggregate of the sections and deductions allowed with respect to the farm land in the hands of such transferee is zero.
(c) Limitation for certain tax-free transactions
(1) Limitation on amount of gain Upon a transfer of farm land described in subparagraph (2) of this paragraph, the amount of gain recognized as ordinary income under section shall not exceed an amount equal to the excess (if any) of
(i) the amount of gain recognized to the transferor on the transfer (determined without regard to section ) over
(ii) the amount (if any) of gain recognized as ordinary income under section . For purposes of this subparagraph, the principles of shall apply. Thus, in the case of a transfer of farm land and property other than farm land in one transaction, the amount realized from the disposition of the farm land (as determined in a manner consistent with the principles of ) 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 farm land 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 is eligible to be recognized as ordinary income under section . The provisions of this paragraph do 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 referred to in subparagraph (1) of this paragraph are transfers of farm land in which the basis of such 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 subparagraph (1) of this paragraph to such a complete liquidation, the principles of shall apply. Thus, for example, the provisions of subparagraph (1) of this paragraph do not apply to a liquidating distribution of farm land by an 80-percent-or-more controlled subsidiary to its parent if the parent's basis for the property is determined, under section , by reference to its basis for the stock of the subsidiary.
(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). See of this section.
(vii) Section (relating to distributions by a partnership to a partner). For special carryover of basis rule, see of this section.
(3) Treatment of farm land in the hands of tranferee See of this section for treatment of the transferee in the case of a disposition to which this paragraph applies.
(4) Examples The provisions of this paragraph may be illustrated by the following examples:
Example 1. On January 4, 1975, A, an individual calendar year taxpayer, owns a parcel of farm land, which he acquired on March 25, 1970, having an adjusted basis of $15,000 and a fair market value of $40,000. On that date he transfers the parcel to corporation M in exchange for stock in the corporation worth $40,000 in a transaction qualifying under section . On the date of such transfer, the aggregate of the deductions allowed under sections and with respect to the land is $18,000. Without regard to section , A would recognize no gain under section upon the transfer and M's basis for the land would be determined under section by reference to its basis in the hands of A. Thus, as a result of the disposition, no gain is recognized as ordinary income under section or section by A since the amount of gain recognized under such sections is limited to the amount of gain which is recognized under section (determined without regard to sections and ). See and subparagraph (1) of this paragraph. For treatment of the farm land in the hands of B, see of this section. For effect of the transfer on the excess deductions account of A and of B, see .
Example 2. Assume the same facts in example (1), except that A transferred the land to M for stock in the corporation worth $32,000 and $8,000 cash. The gain realized is $25,000 (amount realized, $40,000, minus adjusted basis, $15,000). Without regard to section , A would recognize $8,000 of gain under section . Assume further that no gain is recognized as ordinary income under section . Therefore, since the applicable percentage, 100 percent, of the aggregate of the deductions allowed under sections and , $18,000, is lower than the gain realized, $25,000, the amount of gain to be recognized as ordinary income under section would be $18,000 if the provisions of subparagraph (1) of this paragraph do not apply. Since under section gain in the amount of $8,000 would be recognized to the transferor without regard to section , the limitation provided in subparagraph (1) of this paragraph limits the gain taken into account by A under section to $8,000.
Example 3.
Assume the same facts as in example (2), except that $5,000 of gain is recognized as ordinary income under section . The amount of gain recognized as ordinary income under section is $3,000 computed as follows:
| (1) Amount of gain under section 1252(a)(1) (determined without regard to subparagraph (1) of this paragraph): | |
| (a) Aggregate of deductions allowed under sections 175 and 182 | $18,000 |
| (b) Minus: Gain recognized as ordinary income under section 1251(c)(1) | $5,000 |
| (c) Difference | $13,000 |
| (d) Multiply: Applicable percentage for property disposed of within the fifth year after it was acquired | 100% |
| (e) Amount in paragraph (a)(1)(i)(a) of § 1.1252-1 | $13,000 |
| (f) Gain realized (amount realized $40,000, less adjusted basis, $15,000) | $25,000 |
| (g) Minus: Amount in line (b) | $5,000 |
| (h) Amount in paragraph (a)(1)(i)(b) of § 1.1252-1 | $20,000 |
| (i) Lower of line (e) or (h) | $13,000 |
| (2) Limitation in subparagraph (1) of this paragraph: | |
| (a) Gain recognized (determined without regard to section 1252) | $8,000 |
| (b) Minus: Gain recognized as ordinary income under section 1251(c)(1) | $5,000 |
| (c) Difference | $3,000 |
| (3) Lower of line (1)(i) or line (2)(c) | $3,000 |
Thus, the entire gain recognized under section (determined without regard to sections and ), $8,000, is recognized as ordinary income since that amount is equal to the sum of the gain recognized as ordinary income under section , $5,000, and under section , $3,000.
(d) Limitation for like kind exchanges and involuntary conversions
(1) General rule If farm land 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 recognized as ordinary income by the transferor under section shall not exceed the sum of:
(i) The excess (if any) of (a) the amount of gain recognized on such disposition (determined without regard to section ) over (b) the amount (if any) of gain recognized as ordinary income under section , plus
(ii) The fair market value of property acquired which is not farm land and which is not taken into account under subdivision (i) of this subparagraph (that is, the fair market value of property other than farm land acquired which is qualifying property under section or , as the case may be).
(2) Examples The provisions of subparagraph (1) of this paragraph may be illustrated by the following examples:
Example 1.
(i) Assume the same facts as in example (2)(ii) of . Assume further that the aggregate of the amount of sections and deductions allowable is equal to the amount allowed. Under , $18,000 would be recognized as ordinary income under section (determined without regard to subparagraph (1) of this paragraph), computed as follows:
| (1) Aggregate of deductions allowed under sections 175 and 182 | $18,000 |
| (2) Minus: Gain recognized as ordinary income under section 1251(c)(1) | 0 |
| (3) Difference | $18,000 |
| (4) Multiply: Applicable percentage for property disposed of within the fifth year after it was acquired | 100% |
| (5) Amount in paragraph (a)(1)(i)(a) of § 1.1252-1 | $18,000 |
| (6) Gain realized (amount realized, $67,500, less adjusted basis, $48,000) | $19,500 |
| (7) Minus: Amount in line (2) | 0 |
| (8) Amount in paragraph (a)(1)(i)(b) of § 1.1252-1 | $19,500 |
| (9) Lower of line (5) or line (8) | $18,000 |
(ii) Although no gain was recognized under section and the stock purchased by A for $67,500 is farm recapture property for purposes of section , it is not farm land for purposes of section . Nevertheless, although no gain would be recognized under sections and (determined without regard to section ), the limitation under subparagraph (1) of this paragraph is $67,500 (that is, the fair market value of property other than farm land acquired which is qualifying property under section ). Since the amount of gain which would be recognized as ordinary income under section (determined without regard to subparagraph (1) of this paragraph), $18,000 (as computed in subdivision (i) of this example), is lower than the amount of such limitation, $67,500, accordingly, only $18,000 is recognized as ordinary income under section . For determination of basis of the stock acquired, see subparagraph (5) of this paragraph.
Example 2.
(i) Assume the same facts as in example (1) of this subparagraph, except that the cost of the stock was $62,500 (its fair market value). Thus, the amount of gain recognized on the disposition under section (determined without regard to sections and ) is $5,000, that is, $67,500 minus $62,500. Assume further that $5,000 (the amount of gain recognized under section (so determined)) was recognized as ordinary income under section . The amount of gain recognized as ordinary income under section is $13,000, computed as follows:
| (1) Amount of gain under section 1252(a)(1) (determined without regard to subparagraph (1) of this paragraph): | |
| (a) Aggregate of deductions allowed under sections 175 and 182 | $18,000 |
| (b) Minus: Gain recognized as ordinary income under section 1251(c)(1) | $5,000 |
| (c) Difference | $13,000 |
| (d) Multiply: Applicable percentage for property disposed of within the fifth year after it was acquired | 100% |
| (e) Amount in paragraph (a)(1)(i)(a) of § 1.1252-1 | $13,000 |
| (f) Gain realized (amount realized, $67,500 (less adjusted basis, $48,000)) | $19,500 |
| (g) Minus: Amount in line (b) | $5,000 |
| (h) Amount in paragraph (a)(1)(i)(b) of § 1.1252-1 | $14,500 |
| (i) Lower of line (e) or (h) | $13,000 |
| (2) Limitation in subparagraph (1) of this paragraph: | |
| (a) Gain recognized (determined without regard to section 1252) | $5,000 |
| (b) Minus: Gain recognized as ordinary income under section 1251(c)(1) | $5,000 |
| (c) Difference | 0 |
| (d) Plus; The fair market value of property other than farm land acquired which is qualifying property under section 1033 | $62,500 |
| (e) Sum of lines (c) and (d) | $62,500 |
| (3) Lower of line (1)(i) or line (2)(e) | $13,000 |
(3) Application to single disposition of farm land and property of different class
(i) If upon a sale of farm land gain would be recognized under section , and if such land together with property of a different class or classes is disposed of in one transaction in which gain is not recognized in whole or in part under section or (without regard to section ), then rules consistent with the principles of (relating to gain from disposition of certain depreciable realty) shall apply for purposes of allocating the amount realized to each of the classes of property disposed of and for purposes of determining what property the amount realized for each class consists of.
(ii) For purposes of this subparagraph, the classes of property other than farm recapture property (as defined in section and ) are (a) section property, (b) section property, and (c) other property.
(iii) For purposes of this subparagraph, the classes of farm recapture property are (a) land, (b) section property, and (c) other property.
(4) Treatment of farm land received in like kind exchange or involuntary conversion The aggregate of the deductions allowed under sections and in respect of land acquired in a transaction described in subparagraph (1) of this paragraph shall include the aggregate of the deductions allowed under sections and in respect of the land transferred or converted (as the cr sections and in respect of land acquired in a transaction described in subparagraph (1) of this paragraph shall include the aggregate of the deductions allowed under sections and in respect of the land transferred or converted (as the case may be) in such transaction minus the amount of gain taken into account under sections and with respect to the land transferred or converted. Upon a subsequent disposition of such land, the holding period shall include the holding period with respect to the land transferred or converted.
(5) Basis adjustment In order to reflect gain recognized under section if property is acquired in a transaction to which subparagraph (1) of this paragraph applies, its basis shall be determined under the rules of section or .
(e) Partnerships [Reserved]
(f) Treatment of farm land received by a transferee in a disposition by gift and certain tax-free transactions
(1) General rule If farm land is disposed of in a transaction which is either a gift to which of this section applies, or a completely tax-free transfer to which of this section applies, then for purposes of section :
(i) The aggregate of the deductions allowed under sections and in respect of the land in the hands of the tranferee immediately after the disposition shall be an amount equal to the amount of such aggregate in the hands of the transferor immediately before the disposition, and
(ii) For purposes of applying section upon a subsequent disposition by the transferee (including a computation of the applicable percentage), the holding period of the transferee shall include the holding period of the transferor.
(2) Certain partially tax-free transfers If farm land is disposed of in a transaction which either is in part a sale or exchange and in part a gift to which of this section applies, or is a partially tax-free transfer to which of this section applies, then for purposes of section the amount determined under subparagraph (1)(i) of this paragraph shallbe reduced by the amount of gain taken into account under sections and by the transferor upon the disposition. Upon a subsequent disposition by the transferee, the holding period for purposes of computing the amount under section , with respect to the 175 and 182 deductions taken by the transferor, shall include the holding period of the transferor. With respect to the 1975 and 182 deductions taken by the transferee, the holding period shall not include the holding period of the transferor.
(3) Examples The provisions of subparagraphs (1) and (2) of this paragraph may be illustrated by the following examples:
Example 1. Assume the same facts as in example (1) of of this section. Therefore, on the date B receives the farm land in the gift transaction, under subparagraph (1) of this paragraph the aggregate of the deductions allowed under sections and in respect of the farm land in the hands of B is the amount in the hands of A, $24,000, and for purposes of applying section upon a subsequent disposition by B (including a computation of the applicable percentage) the holding period of B includes the holding period of A.
Example 2. Assume the same facts as in example (2) of of this section. Under subparagraph (2) of this paragraph, the aggregate of the sections and deductions which pass over to B for purposes of section is $14,000 ($24,000 deductions allowable under sections and minus $3,000 gain recognized under section in accordance with example (2) of , minus $7,000 gain recognized under section in acordance with example (2) of of this section), B's holding period includes the holding period of A (i.e., the period back to January 15, 1971) with respect to A's deductions.
(g) Disposition of farm land not specifically covered If farm land is disposed of in a transaction not specifically covered under and this section, then the principles of section shall apply.
[T.D. 7418, 41 FR 18832, May 7, 1976; 41 FR 23669, June 11, 1976]