[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1001-1]
[Page 11-15]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
PART 1--INCOME TAXES--Table of Contents
Sec. 1.1001-1 Computation of gain or loss.
(a) General rule. Except as otherwise provided in subtitle A of the
Code, the gain or loss realized from the conversion of property into
cash, or from the exchange of property for other property differing
materially either in kind or in extent, is treated as income or as loss
sustained. The amount realized from a sale or other disposition of
property is the sum of any money received plus the fair market value of
any property (other than money) received. The fair market value of
property is a question of fact, but only in rare and extraordinary cases
will property be considered to have no fair market value. The general
method of computing such gain or loss is prescribed by section 1001 (a)
through (d) which contemplates that from the amount realized upon the
sale or exchange there shall be withdrawn a sum sufficient to restore
the adjusted basis prescribed by section 1011 and the regulations
thereunder (i.e., the cost or other basis adjusted for receipts,
expenditures, losses, allowances, and other items chargeable against and
applicable to such cost or other basis). The amount which remains after
the adjusted basis has been restored to the taxpayer constitutes the
realized gain. If the amount realized upon the sale or exchange is
insufficient to restore to the taxpayer the adjusted basis of the
property, a loss is sustained to the extent of the difference between
such adjusted basis and the amount realized. The basis may be different
depending upon whether gain or loss is being computed. For example, see
section 1015(a) and the regulations thereunder. Section 1001(e) and
paragraph (f) of this section prescribe the method of computing gain or
loss upon the sale or other disposition of a term interest in property
the adjusted basis (or a portion) of which is determined pursuant, or by
reference, to section 1014 (relating to the basis of property acquired
from a decedent) or section 1015 (relating to
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the basis of property acquired by gift or by a transfer in trust).
(b) Real estate taxes as amounts received. (1) Section 1001(b) and
section 1012 state rules applicable in making an adjustment upon a sale
of real property with respect to the real property taxes apportioned
between seller and purchaser under section 164(d). Thus, if the seller
pays (or agrees to pay) real property taxes attributable to the real
property tax year in which the sale occurs, he shall not take into
account, in determining the amount realized from the sale under section
1001(b), any amount received as reimbursement for taxes which are
treated under section 164(d) as imposed upon the purchaser. Similarly,
in computing the cost of the property under section 1012, the purchaser
shall not take into account any amount paid to the seller as
reimbursement for real property taxes which are treated under section
164(d) as imposed upon the purchaser. These rules apply whether or not
the contract of sale calls for the purchaser to reimburse the seller for
such real property taxes paid or to be paid by the seller.
(2) On the other hand, if the purchaser pays (or is to pay) an
amount representing real property taxes which are treated under section
164(d) as imposed upon the seller, that amount shall be taken into
account both in determining the amount realized from the sale under
section 1001(b) and in computing the cost of the property under section
1012. It is immaterial whether or not the contract of sale specifies
that the sale price has been reduced by, or is in any way intended to
reflect, the taxes allocable to the seller. See also paragraph (b) of
Sec. 1.1012-1.
(3) Subparagraph (1) of this paragraph shall not apply to a seller
who, in a taxable year prior to the taxable year of sale, pays an amount
representing real property taxes which are treated under section 164(d)
as imposed on the purchaser, if such seller has elected to capitalize
such amount in accordance with section 266 and the regulations
thereunder (relating to election to capitalize certain carrying charges
and taxes).
(4) The application of this paragraph may be illustrated by the
following examples:
Example 1. Assume that the contract price on the sale of a parcel of
real estate is $50,000 and that real property taxes thereon in the
amount of $1,000 for the real property tax year in which occurred the
date of sale were previously paid by the seller. Assume further that
$750 of the taxes are treated under section 164(d) as imposed upon the
purchaser and that he reimburses the seller in that amount in addition
to the contract price. The amount realized by the seller is $50,000.
Similarly, $50,000 is the purchaser's cost. If, in this example, the
purchaser made no payment other than the contract price of $50,000, the
amount realized by the seller would be $49,250, since the sales price
would be deemed to include $750 paid to the seller in reimbursement for
real property taxes imposed upon the purchaser. Similarly, $49,250 would
be the purchaser's cost.
Example 2. Assume that the purchaser in example (1), above, paid all
of the real property taxes. Assume further that $250 of the taxes are
treated under section 164(d) as imposed upon the seller. The amount
realized by the seller is $50,250. Similarly, $50,250 is the purchaser's
cost, regardless of the taxable year in which the purchaser makes actual
payment of the taxes.
Example 3. Assume that the seller described in the first part of
example (1), above, paid the real property taxes of $1,000 in the
taxable year prior to the taxable year of sale and elected under section
266 to capitalize the $1,000 of taxes. In such a case, the amount
realized is $50,750. Moreover, regardless of whether the seller elected
to capitalize the real property taxes, the purchaser in that case could
elect under section 266 to capitalize the $750 of taxes treated under
section 164(d) as imposed upon him, in which case his adjusted basis
would be $50,750 (cost of $50,000 plus capitalized taxes of $570).
(c) Other rules. (1) Even though property is not sold or otherwise
disposed of, gain is realized if the sum of all the amounts received
which are required by section 1016 and other applicable provisions of
subtitle A of the Code to be applied against the basis of the property
exceeds such basis. Except as otherwise provided in section 301(c)(3)(B)
with respect to distributions out of increase in value of property
accrued prior to March 1, 1913, such gain is includible in gross income
under section 61 as ``income from whatever source derived''. On the
other hand, a loss is not ordinarily sustained prior to the sale or
other disposition of
[[Page 13]]
the property, for the reason that until such sale or other disposition
occurs there remains the possibility that the taxpayer may recover or
recoup the adjusted basis of the property. Until some identifiable event
fixes the actual sustaining of a loss and the amount thereof, it is not
taken into account.
(2) The provisions of subparagraph (1) of this paragraph may be
illustrated by the following example:
Example: A, an individual on a calendar year basis, purchased
certain shares of stock subsequent to February 28, 1913, for $10,000. On
January 1, 1954, A's adjusted basis for the stock had been reduced to
$1,000 by reason of receipts and distributions described in sections
1016(a)(1) and 1016(a)(4). He received in 1954 a further distribution of
$5,000, being a distribution covered by section 1016(a)(4), other than a
distribution out of increase of value of property accrued prior to March
1, 1913. This distribution applied against the adjusted basis as
required by section 1016(a)(4) exceeds that basis by $4,000. The $4,000
excess is a gain realized by A in 1954 and is includible in gross income
in his return for that calendar year. In computing gain from the stock,
as in adjusting basis, no distinction is made between items of receipts
or distributions described in section 1016. If A sells the stock in 1955
for $5,000, he realizes in 1955 a gain of $5,000, since the adjusted
basis of the stock for the purpose of computing gain or loss from the
sale is zero.
(d) Installment sales. In the case of property sold on the
installment plan, special rules for the taxation of the gain are
prescribed in section 453.
(e) Transfers in part a sale and in part a gift. (1) Where a
transfer of property is in part a sale and in part a gift, the
transferor has a gain to the extent that the amount realized by him
exceeds his adjusted basis in the property. However, no loss is
sustained on such a transfer if the amount realized is less than the
adjusted basis. For the determination of basis of property in the hands
of the transferee, see Sec. 1.1015-4. For the allocation of the adjusted
basis of property in the case of a bargain sale to a charitable
organization, see Sec. 1.1011-2.
(2) Examples. The provisions of subparagraph (1) may be illustrated
by the following examples:
Example 1. A transfers property to his son for $60,000. Such
property in the hands of A has an adjusted basis of $30,000 (and a fair
market value of $90,000). A's gain is $30,000, the excess of $60,000,
the amount realized, over the adjusted basis, $30,000. He has made a
gift of $30,000, the excess of $90,000, the fair market value, over the
amount realized, $60,000.
Example 2. A transfers property to his son for $30,000. Such
property in the hands of A has an adjusted basis of $60,000 (and a fair
market value of $90,000). A has no gain or loss, and has made a gift of
$60,000, the excess of $90,000, the fair market value, over the amount
realized, $30,000.
Example 3. A transfers property to his son for $30,000. Such
property in A's hands has an adjusted basis of $30,000 (and a fair
market value of $60,000). A has no gain and has made a gift of $30,000,
the excess of $60,000, the fair market value, over the amount realized,
$30,000.
Example 4. A transfers property to his son for $30,000. Such
property in A's hands has an adjusted basis of $90,000 (and a fair
market value of $60,000). A has sustained no loss, and has made a gift
of $30,000, the excess of $60,000, the fair market value, over the
amount realized, $30,000.
(f) Sale or other disposition of a term interest in property--(1)
General rule. Except as otherwise provided in subparagraph (3) of this
paragraph, for purposes of determining gain or loss from the sale or
other disposition after October 9, 1969, of a term interest in property
(as defined in subparagraph (2) of this paragraph) a taxpayer shall not
take into account that portion of the adjusted basis of such interest
which is determined pursuant, or by reference, to section 1014 (relating
to the basis of property acquired from a decedent) or section 1015
(relating to the basis of property acquired by gift or by a transfer in
trust) to the extent that such adjusted basis is a portion of the
adjusted uniform basis of the entire property (as defined in
Sec. 1.1014-5). Where a term interest in property is transferred to a
corporation in connection with a transaction to which section 351
applies and the adjusted basis of the term interest (i) is determined
pursuant to section 1014 or 1015 and (ii) is also a portion of the
adjusted uniform basis of the entire property, a subsequent sale or
other disposition of such term interest by the corporation will be
subject to the provisions of section 1001(e) and this paragraph to the
extent that the basis of the term interest so sold or otherwise disposed
of is determined by reference to its basis in the hands of the
transferor as provided by section 362(a). See
[[Page 14]]
subparagraph (2) of this paragraph for rules relating to the
characterization of stock received by the transferor of a term interest
in property in connection with a transaction to which section 351
applies. That portion of the adjusted uniform basis of the entire
property which is assignable to such interest at the time of its sale or
other disposition shall be determined under the rules provided in
Sec. 1.1014-5. Thus, gain or loss realized from a sale or other
disposition of a term interest in property shall be determined by
comparing the amount of the proceeds of such sale with that part of the
adjusted basis of such interest which is not a portion of the adjusted
uniform basis of the entire property.
(2) Term interest defined. For purposes of section 1001(e) and this
paragraph, a term interest in property means--
(i) A life interest in property,
(ii) An interest in property for a term of years, or
(iii) An income interest in a trust.
Generally, subdivisions (i), (ii), and (iii) refer to an interest,
present or future, in the income from property or the right to use
property which will terminate or fail on the lapse of time, on the
occurrence of an event or contingency, or on the failure of an event or
contingency to occur. Such divisions do not refer to remainder or
reversionary interests in the property itself or other interests in the
property which will ripen into ownership of the entire property upon
termination or failure of a preceding term interest. A term interest in
property also includes any property received upon a sale or other
disposition of a life interest in property, an interest in property for
a term of years, or an income interest in a trust by the original holder
of such interest, but only to the extent that the adjusted basis of the
property received is determined by reference to the adjusted basis of
the term interest so transferred.
(3) Exception. Paragraph (1) of section 1001(e) and subparagraph (1)
of this paragraph shall not apply to a sale or other disposition of a
term interest in property as a part of a single transaction in which the
entire interest in the property is transferred to a third person or to
two or more other persons, including persons who acquire such entire
interest as joint tenants, tenants by the entirety, or tenants in
common. See Sec. 1.1014-5 for computation of gain or loss upon such a
sale or other disposition where the property has been acquired from a
decedent or by gift or transfer in trust.
(4) Illustrations. For examples illustrating the application of this
paragraph, see paragraph (c) of Sec. 1.1014-5.
(g) Debt instruments issued in exchange for property--(1) In
general. If a debt instrument is issued in exchange for property, the
amount realized attributable to the debt instrument is the issue price
of the debt instrument as determined under Sec. 1.1273-2 or Sec. 1.1274-
2, whichever is applicable. If, however, the issue price of the debt
instrument is determined under section 1273(b)(4), the amount realized
attributable to the debt instrument is its stated principal amount
reduced by any unstated interest (as determined under section 483).
(2) Certain debt instruments that provide for contingent payments--
(i) In general. Paragraph (g)(1) of this section does not apply to a
debt instrument subject to either Sec. 1.483-4 or Sec. 1.1275-4(c)
(certain contingent payment debt instruments issued for nonpublicly
traded property).
(ii) Special rule to determine amount realized. If a debt instrument
subject to Sec. 1.1275-4(c) is issued in exchange for property, and the
income from the exchange is not reported under the installment method of
section 453, the amount realized attributable to the debt instrument is
the issue price of the debt instrument as determined under Sec. 1.1274-
2(g), increased by the fair market value of the contingent payments
payable on the debt instrument. If a debt instrument subject to
Sec. 1.483-4 is issued in exchange for property, and the income from the
exchange is not reported under the installment method of section 453,
the amount realized attributable to the debt instrument is its stated
principal amount, reduced by any unstated interest (as determined under
section 483), and increased by the fair market value of the contingent
payments payable on the debt instrument. This paragraph (g)(2)(ii),
however, does not apply to a debt instrument if the fair market
[[Page 15]]
value of the contingent payments is not reasonably ascertainable. Only
in rare and extraordinary cases will the fair market value of the
contingent payments be treated as not reasonably ascertainable.
(3) Coordination with section 453. If a debt instrument is issued in
exchange for property, and the income from the exchange is not reported
under the installment method of section 453, this paragraph (g) applies
rather than Sec. 15a.453-1(d)(2) to determine the taxpayer's amount
realized attributable to the debt instrument.
(4) Effective date. This paragraph (g) applies to sales or exchanges
that occur on or after August 13, 1996.
[T.D. 6500, 25 FR 11910, Nov. 26, 1960, as amended by T.D. 7142, 36 FR
18950, Sept. 24, 1971; T.D. 7207, 37 FR 20797, Oct. 5, 1972; T.D. 7213,
37 FR 21992, Oct. 18, 1972; T.D. 8517, 59 FR 4807, Feb. 2, 1994; T.D.
8674, 61 FR 30139, June 14, 1996]