Reg. § 1.453-12 Allocation of unrecaptured section 1250 gain reported on the installment method.
(a) General rule Unrecaptured section gain, as defined in section , is reported on the installment method if that method otherwise applies under section or and the corresponding regulations. If gain from an installment sale includes unrecaptured section gain and adjusted net capital gain (as defined in section ), the unrecaptured section gain is taken into account before the adjusted net capital gain.
(b) Installment payments from sales before May 7, 1997 The amount of unrecaptured section gain in an installment payment that is properly taken into account after May 6, 1997, from a sale before May 7, 1997, is determined as if, for all payments properly taken into account after the date of sale but before May 7, 1997, unrecaptured section gain had been taken into account before adjusted net capital gain.
(c) Installment payments received after May 6, 1997, and on or before August 23, 1999 If the amount of unrecaptured section gain in an installment payment that is properly taken into account after May 6, 1997, and on or before August 23, 1999, is less than the amount that would have been taken into account under this section, the lesser amount is used to determine the amount of unrecaptured section gain that remains to be taken into account.
(d) Examples In each example, the taxpayer, an individual whose taxable year is the calendar year, does not elect out of the installment method. The installment obligation bears adequate stated interest, and the property sold is real property held in a trade or business that qualifies as both section property and section property. In all taxable years, the taxpayer's marginal tax rate on ordinary income is 28 percent. The following examples illustrate the rules of this section:
Example 1. General rule.
This example illustrates the rule of of this section as follows:
(i) In 1999, A sells property for $10,000, to be paid in ten equal annual installments beginning on December 1, 1999. A originally purchased the property for $5000, held the property for several years, and took straight-line depreciation deductions in the amount of $3000. In each of the years 1999-2008, A has no other capital or section gains or losses.
(ii) A's adjusted basis at the time of the sale is $2000. Of A's $8000 of section gain on the sale of the property, $3000 is attributable to prior straight-line depreciation deductions and is unrecaptured section gain. The gain on each installment payment is $800.
(iii) As illustrated in the table in this of this Example 1., A takes into account the unrecaptured section gain first. Therefore, the gain on A's first three payments, received in 1999, 2000, and 2001, is taxed at 25 percent. Of the $800 of gain on the fourth payment, received in 2002, $600 is taxed at 25 percent and the remaining $200 is taxed at 20 percent. The gain on A's remaining six installment payments is taxed at 20 percent. The table is as follows:
| 1999 | 2000 | 2001 | 2002 | 2003 | 2004-2008 | Total gain | |
|---|---|---|---|---|---|---|---|
| Installment gain | 800 | 800 | 800 | 800 | 800 | 4000 | 8000 |
| Taxed at 25% | 800 | 800 | 800 | 600 | 3000 | ||
| Taxed at 20% | 200 | 800 | 4000 | 5000 | |||
| Remaining to be taxed at 25% | 2200 | 1400 | 600 |
Example 2. Installment payments from sales prior to May 7, 1997.
This example illustrates the rule of of this section as follows:
(i) The facts are the same as in Example 1 except that A sold the property in 1994, received the first of the ten annual installment payments on December 1, 1994, and had no other capital or section gains or losses in the years 1994-2003.
(ii) As in Example 1, of A's $8000 of gain on the sale of the property, $3000 was attributable to prior straight-line depreciation deductions and is unrecaptured section gain.
(iii) As illustrated in the following table, A's first three payments, in 1994, 1995, and 1996, were received before May 7, 1997, and taxed at 28 percent. Under the rule described in of this section, A determines the allocation of unrecaptured section gain for each installment payment after May 6, 1997, by taking unrecaptured section gain into account first, treating the general rule of of this section as having applied since the time the property was sold, in 1994. Consequently, of the $800 of gain on the fourth payment, received in 1997, $600 is taxed at 25 percent and the remaining $200 is taxed at 20 percent. The gain on A's remaining six installment payments is taxed at 20 percent. The table is as follows:
| 1994 | 1995 | 1996 | 1997 | 1998 | 1999-2003 | Totalgain | |
|---|---|---|---|---|---|---|---|
| Installment gain | 800 | 800 | 800 | 800 | 800 | 4000 | 8000 |
| Taxed at 28% | 800 | 800 | 800 | 2400 | |||
| Taxed at 25% | 600 | 600 | |||||
| Taxed at 20% | 200 | 800 | 4000 | 5000 | |||
| Remaining to be taxed at 25% | 2200 | 1400 | 600 |
Example 3. Effect of section 1231(c) recapture.
This example illustrates the rule of of this section when there are non-recaptured net section losses, as defined in section , from prior years as follows:
(i) The facts are the same as in Example 1, except that in 1999 A has non-recaptured net section losses from the previous four years of $1000.
(ii) As illustrated in the table in paragraph (iv) of this Example 3, in 1999, all of A's $800 installment gain is recaptured as ordinary income under section . Under the rule described in of this section, for purposes of determining the amount of unrecaptured section gain remaining to be taken into account, the $800 recaptured as ordinary income under section is treated as reducing unrecaptured section gain, rather than adjusted net capital gain. Therefore, A has $2200 of unrecaptured section gain remaining to be taken into account.
(iii) In the year 2000, A's installment gain is taxed at two rates. First, $200 is recaptured as ordinary income under section . Second, the remaining $600 of gain on A's year 2000 installment payment is taxed at 25 percent. Because the full $800 of gain reduces unrecaptured section gain, A has $1400 of unrecaptured section gain remaining to be taken into account.
(iv) The gain on A's installment payment received in 2001 is taxed at 25 percent. Of the $800 of gain on the fourth payment, received in 2002, $600 is taxed at 25 percent and the remaining $200 is taxed at 20 percent. The gain on A's remaining six installment payments is taxed at 20 percent. The table is as follows:
| 1999 | 2000 | 2001 | 2002 | 2003 | 2004-2008 | Totalgain | |
|---|---|---|---|---|---|---|---|
| Installment gain | 800 | 800 | 800 | 800 | 800 | 4000 | 8000 |
| Taxed at ordinary rates under section 1231(c) | 800 | 200 | 1000 | ||||
| Taxed at 25% | 600 | 800 | 600 | 2000 | |||
| Taxed at 20% | 200 | 800 | 4000 | 5000 | |||
| Remaining non-recaptured net section 1231 losses | 200 | ||||||
| Remaining to be taxed at 25% | 2200 | 1400 | 600 |
Example 4. Effect of a net section 1231 loss.
This example illustrates the application of of this section when there is a net section loss as follows:
(i) The facts are the same as in Example 1 except that A has section losses of $1000 in 1999.
(ii) In 1999, A's section installment gain of $800 does not exceed A's section losses of $1000. Therefore, A has a net section loss of $200. As a result, under section all of A's section gains and losses are treated as ordinary gains and losses. As illustrated in the following table, A's entire $800 of installment gain is ordinary gain. Under the rule described in of this section, for purposes of determining the amount of unrecaptured section gain remaining to be taken into account, A's $800 of ordinary section installment gain in 1999 is treated as reducing unrecaptured section gain. Therefore, A has $2200 of unrecaptured section gain remaining to be taken into account.
(iii) In the year 2000, A has $800 of section installment gain, resulting in a net section gain of $800. A also has $200 of non-recaptured net section losses. The $800 gain is taxed at two rates. First, $200 is taxed at ordinary rates under section , recapturing the $200 net section loss sustained in 1999. Second, the remaining $600 of gain on A's year 2000 installment payment is taxed at 25 percent. As in Example 3, the $200 of section gain is treated as reducing unrecaptured section gain, rather than adjusted net capital gain. Therefore, A has $1400 of unrecaptured section gain remaining to be taken into account.
(iv) The gain on A's installment payment received in 2001 is taxed at 25 percent, reducing the remaining unrecaptured section gain to $600. Of the $800 of gain on the fourth payment, received in 2002, $600 is taxed at 25 percent and the remaining $200 is taxed at 20 percent. The gain on A's remaining six installment payments is taxed at 20 percent. The table is as follows:
| 1999 | 2000 | 2001 | 2002 | 2003 | 2004-2008 | Total gain | |
|---|---|---|---|---|---|---|---|
| Installment gain | 800 | 800 | 800 | 800 | 800 | 4000 | 8000 |
| Ordinary gain under section 1231(a) | 800 | 800 | |||||
| Taxed at ordinary rates under section 1231(c) | 200 | 200 | |||||
| Taxed at 25% | 600 | 800 | 600 | 2000 | |||
| Taxed at 20% | 200 | 800 | 4000 | 5000 | |||
| Net section 1231 loss | 200 | ||||||
| Remaining to be taxed at 25% | 2200 | 1400 | 600 |
(e) Effective date This section applies to installment payments properly taken into account after August 23, 1999.
[T.D. 8836, 64 FR 45875, Aug. 23, 1999]