Reg. § 16A.1255-2 Special rules.
(a) Exception for gifts
(1) General rule In general, no gain shall be recognized under section upon a disposition of section property 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.
(2) Disposition in part a sale or exchange and in part a gift Where a disposition of section property 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 section property.
(3) Treatment of section 126 property 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, 1986, A makes a gift to B of a parcel of land having an adjusted basis of $40,000 and fair market value of $65,000. On the date of that gift, the aggregate of excludable portions under section was $24,000. The section payments were all received on January 15, 1981. Upon making the gift, A recognizes no gain under section . See of this section. For treatment of the property in the hands of B, see example (1) of of this section.
Example (2).
(i) Assume the same facts as in example (1), except that A transfers the land to B for $50,000. Assume further that no gain is recognized as ordinary income under any other provision of Chapter I, Subchapter P, Part IV of the Code. 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 $10,000 as ordinary income under section , computed under of this section as follows:
| (1) Aggregate of excludable portions under section 126 | $24,000 |
| (2) Multiply: Applicable percentage for land disposed if within sixth year after section 126 payments were received | 100 |
| (3) Amount in § 16A.1255-1(a)(1)(i) | $24,000 |
| (4) Gain realized (see (i) of this example) | 10,000 |
| (5) Amount in § 16A.1255-1(a)(1)(ii) applied in accordance with paragraph (a)(2) of this section | 10,000 |
| (6) Lower of line (3) or line (5) | 10,000 |
Thus, the entire gain realized on the transfer, $10,000, is recognized as ordinary income.
For treatment of the farm land in the hands of B, see example (2) of of this section.
(b) Exception for transfer 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 section 126 property in hands of transferee If, as of the date a person acquires section property from a decedent, the 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 that date the aggregate of excludable portions under section 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 section property described in of this section, 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 the other provisions of Chapter I, Subchapter P, Part IV of the Code. For purposes of of this section, the principles of shall apply. Thus, in the case of a transfer of section property and other property in one transaction, the amount realized from the disposition of the section property (as determined in a manner consistent with the principles of ) shall consist of that portion of the fair market value of each property acquired which bears the same ratio to the fair market value of the 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 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 I of the Code.
(2) Transfers covered The transfers referred to in of this section are transfers of section 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 of this section to such a complete liquidation, the principles of shall apply. Thus, for example, the provisions of of this section do not apply to a liquidating distribution of section property 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 the 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.
(viii) Section (relating to like kind exchanges).
(ix) Section (relating to rollover of gain on the sale of a principal residence).
(3) Treatment of section 126 property in the 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 January 4, 1986, A holds a parcel of property that is section property 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 the transfer, the aggregate of excludable portions under section with respect to the transferred property is $18,000 and all of such amount was received on March 25, 1981. With 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 by A since the amount of gain recognized under that section is limited to the amount of gain which is recognized under section (determined without regard to section ). See of this section. For treatment of the section property in the hands of B, see of this section.
Example (2). Assume the same facts in example (1), except that A transferred the property 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 the other provisions of Chapter I, Subchapter P, Part IV of the Code. Therefore, since the applicable percentage, 100 percent of the aggregate excludable portions under section , $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 of this section 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 of this section 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 1255(a)(1) (determined without regard to paragraph (c)(1) of this section): | |
| (a) Aggregate of excludable portions under section 126 | $18,000 |
| (b) Multiply: Applicable percentage for property disposed of within the fifth year after section 126 payments were received (percent) | 100 |
| (c) Amount in § 16A.1255-1(a)(1)(i) | $18,000 |
| (d) Gain realized (amount realized $40,000 less adjusted basis, $15,000) | $25,000 |
| (e) Lower of line (c) or line (d) | $18,000 |
| (2) Limitation in paragraph (c)(1) of this section: | |
| (a) Gain recognized (determined without regard to section 1255) | $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)(e) 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) Treatment of section 126 property received by a transferee in a disposition by gift and certain tax-free transactions
(1) General rule If section property 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 excludable portions under section in respect of the land in the hands of the transferee 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 dates of receipt of section payments shall not be affected by the dispositions.
(2) Certain partially tax-free transfers If section property 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 of this section shall be reduced by the amount of gain taken into account under section by the transferor upon the disposition. Upon a subsequent disposition by the transferee, the dates of receipt of section payments remain the same in the hands of the transferee as they were in the hands of the transferor. With respect to the 175 and 182 deductions taken by the transferee, the holding period shall not include the holding period of the transferor.
(3) Examples The provisions 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 land in the gift transaction, under of this section the aggregate of excludable portions under section in respect of the 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 date the section payments were received is the same as it was when the property was in A's hands (January 15, 1981).
Example (2). Assume the same facts as in example (2) of of this section. Under of this section, the aggregate of excludable portions under section which pass over to B for purposes of section is $14,000 ($24,000 excluded under section minus $10,000 gain recognized under section in accordance with example (2) of of this section). The date the section payments were received is the same as when the property was in B's hands (January 15, 1981).
(e) Disposition of section 126 property not specifically covered If section property is disposed of in a transaction not specifically covered under , and this section, then the principles of section shall apply.