Reg. § 16A.1255-1 General rule for treatment of gain from disposition of section 126 property.
(a) Ordinary income
(1) General rule Except as otherwise provided in this section and , if section property is disposed of after September 30, 1979, then under section there shall be recognized as ordinary income the lesser of—
(i) The “excludable portion” under section , or
(ii)
(A) The excess of the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of the section property (in the case of any other disposi-tion), over the adjusted basis of the property, less
(B) The amount recognized as ordinary income under the other provisions of Chapter I, Subchapter P, Part IV of the Code.
(2) Application of section Any gain treated as ordinary income under section shall be recognized as ordinary income notwithstanding any other provision of subtitle A of the Code except that section does not apply to the extent the gain is recognized as ordinary income under the other provisions of Subchapter P, Part IV of the Code. For special rules with respect to the application of section , see . For the relation of section to other provisions, see of this section.
(3) Meaning of terms For purposes of section and these regulations—
(i) The term “section property” means any property acquired, improved, or otherwise modified as a result of a payment listed in section which has been certified by the Secretary of Agriculture as primarily for the purpose of conservation;
(ii) The term “excludable portion” is defined in ;
(iii) The term “disposition” has the same meaning as in ;
(iv) The term “date of receipt of the section payment” means the last date the government made a payment for the improvements.
(4) Applicable percentage If section property is disposed of less than 10 years after the date of receipt of the last payment which has been certified by the Secretary of Agriculture as primarily for the purpose of conservation, the “applicable percentage” is 100 percent; if section property is disposed of more than 10 years after that date, the applicable percentage is 100 percent reduced (but not below zero) by 10 percent for each year or part thereof in excess of 10 years such property was held after the date of the section payment.
(5) Portion of parcel The amount of gain to be recognized as ordinary income under section shall be determined separately for each parcel of section property in a manner consistent with the principles of § 1245-1(a) (4) and (5) relating to gain from disposition of certain depreciable property. If
(i) only a portion of a parcel of section property is disposed of in a transaction, or if two or more portions of a single parcel are disposed of in one transaction, and
(ii) the aggregate of “excludable portions” with respect to any such portion cannot be established to the satisfaction of the Commissioner, then the aggregate of the “excludable portions” in respect of the entire parcel shall be allocated to each portion in proportion to the fair market value of each at the time of the disposition.
(b) Instances of nonapplication
(1) In general Section does not apply if a taxpayer disposes of section property more than 20 years after receipt of the last section payment with respect to the property.
(2) Losses Section does not apply to losses. Thus, section does not apply if a loss is realized upon a sale, exchange, or involuntary conversion of property, all of which is section property, nor does the section apply to a disposition of the property other than by way of sale, exchange, or involuntary conversion if at the time of the disposition the fair market value of the property is not greater than its adjusted basis.
(c) Relation of section 1255 to other provisions
(1) General The provisions of section apply notwithstanding any other provisions of Subtitle A of the Code except that they do not apply to the extent gain is recognized as ordinary income under the other provisions of Subchapter P, Part IV of the Code. Thus, unless an exception or limitation under applies, gain under section is recognized notwithstanding any contrary nonrecognition provision or income characterizing provision. For example, since section overrides section (relating to property used in the trade or business), the gain recognized under section upon a disposition of section property will be treated as ordinary income and only the remaining gain, if any, from the disposition may be considered as gain from the sale or exchange of property to which section applies. See example (1) of of this section.
(2) Nonrecognition sections overridden The nonrecognition of gain provisions of Subtitle A of the Code which section overrides include, but are not limited to, sections , , , , and . See for the extent to which section overrides sections , , , 371(a), , , , , and .
(3) Installment method Gain from a disposition to which section applies may be reported under the installment method if such method is otherwise available under section 453 of the Code. In such a case, the portion of the installment payment that is gain is treated as follows: first as ordinary gain under other sections of Chapter I Subchapter P, Part IV of the Code until all that gain has been reported; next as ordinary gain to which section applies until all that gain is reported; and finally as gain under other sections of Chapter I, Subchapter D, Part IV of the Code. For treatment of amounts as interest on certain deferred payments, see section .
(4) Exempt income With regard to exempt income, the principles of shall be applicable.
(5) Treatment of gain not recognized under section 1255(a)(1) For treatment of gain not recognized under this section, the principles of shall be applicable.
(d) Example The provisions of this section may be illustrated by the following example:
Example. Individual A uses the calendar year as his taxable year. On April 10, 1995, A sells for $75,000 section property with an adjusted basis of $52,500 for a realized gain of $22,500. The excludable portion under section was $18,000. A received the section payment on January 5, 1990. No gain is recognized as ordinary gain under sections through . Because the applicable percentage, 100 percent, of the aggregate of the section improvements ($18,000), $18,000, is lower than the gain realized, $22,500, the amount of gain recognized as ordinary income under section is $18,000. The remaining $4,500 of the gain may be treated as gain from the sale or exchange of property described in section .