26 CFR § 16A.1255-2 - Special rules.
(a) Exception for gifts—(1) General rule. In general, no gain shall be recognized under section 1255(a)(1) upon a disposition of section 126 property by gift. For purposes of section 1255 and this paragraph, the term “gift” shall have the same meaning as in § 1.1245-4(a) and, with respect to the application of this paragraph, principles illustrated by the examples of § 1.1245-4(a)(2) shall apply.
(2) Disposition in part a sale or exchange and in part a gift. Where a disposition of section 126 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 1255(a)(1) shall be computed under § 16A.1255-1(a)(1), applied by treating the gain realized (for purposes of § 16A.1255-1(a)(1)(ii)), as the excess of the amount realized over the adjusted basis of the section 126 property.
(3) Treatment of section 126 property in hands of transferee. See paragraph (d) 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:
(ii) Upon the transfer of the land to B, A recognizes $10,000 as ordinary income under section 1255(a)(1), computed under paragraph (a)(2) of this section as follows:
(1) Aggregate of excludable portions under section 126 | $24,000 |
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(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 |
For treatment of the farm land in the hands of B, see example (2) of paragraph (d)(3) of this section.
(b) Exception for transfer at death—(1) In general. Except as provided in section 691 (relating to income in respect of a decedent), no gain shall be recognized under section 1255(a)(1) upon a transfer at death. For purposes of section 1255 and this paragraph, the term “transfer at death” shall have the same meaning as in § 1.1245-4(b) and, with respect to the application of this paragraph, principles illustrated by the examples of § 1.1245-4(b)(2) shall apply.
(2) Treatment of section 126 property in hands of transferee. If, as of the date a person acquires section 126 property from a decedent, the person's basis is determined by reason of the application of section 1014(a), 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 2032 (relating to alternative valuation date), then on that date the aggregate of excludable portions under section 126 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 126 property described in paragraph (c)(2) of this section, the amount of gain recognized as ordinary income under section 1255(a)(1) 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 1255) 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 paragraph (c)(1) of this section, the principles of § 1.1245-4(c)(1) shall apply. Thus, in the case of a transfer of section 126 property and other property in one transaction, the amount realized from the disposition of the section 126 property (as determined in a manner consistent with the principles of § 1.1245-1(a)(5)) 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 126 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 1255) which is eligible to be recognized as ordinary income under section 1255(a)(1). The provisions of this paragraph do not apply to a disposition of property to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by Chapter I of the Code.
(2) Transfers covered. The transfers referred to in paragraph (c)(1) of this section are transfers of section 126 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 332 (relating to distributions in complete liquidation of an 80-percent-or-more controlled subsidiary corporation). For application of paragraph (c)(1) of this section to such a complete liquidation, the principles of § 1.1245-4(c)(3) shall apply. Thus, for example, the provisions of paragraph (c)(1) of this section do not apply to a liquidating distribution of section 126 property by an 80-percent-or-more controlled subsidiary to its parent if the parent's basis for the property is determined, under section 334(b)(2), by reference to its basis for the stock of the subsidiary.
(ii) Section 351 (relating to transfer to a corporation controlled by the transferor).
(iii) Section 361 (relating to exchanges pursuant to certain corporate reorganizations).
(iv) Section 371(a) (relating to exchanges pursuant to certain receivership and bankruptcy proceedings).
(v) Section 374(a) (relating to exchanges pursuant to certain railroad reorganizations).
(vi) Section 721 (relating to transfers to a partnership in exchange for a partnership interest). See paragraph (e) of this section.
(vii) Section 731 (relating to distributions by a partnership to a partner). For special carryover of basis rule, see paragraph (e) of this section.
(viii) Section 1031 (relating to like kind exchanges).
(ix) Section 1034 (relating to rollover of gain on the sale of a principal residence).
(3) Treatment of section 126 property in the hands of transferee. See paragraph (d) 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:
(1) Amount of gain under section 1255(a)(1) (determined without regard to paragraph (c)(1) of this section): | |
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(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 |
(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 126 property is disposed of in a transaction which is either a gift to which paragraph (a)(1) of this section applies, or a completely tax-free transfer to which paragraph (c)(1) of this section applies, then for purposes of section 1255—
(i) The aggregate of the excludable portions under section 126 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 1255 upon a subsequent disposition by the transferee (including a computation of the applicable percentage), the dates of receipt of section 126 payments shall not be affected by the dispositions.
(2) Certain partially tax-free transfers. If section 126 property is disposed of in a transaction which either is in part a sale or exchange and in part a gift to which paragraph (a)(2) of this section applies, or is a partially tax-free transfer to which paragraph (c)(1) of this section applies, then for purposes of section 1255 the amount determined under paragraph (d)(1) of this section shall be reduced by the amount of gain taken into account under section 1255 by the transferor upon the disposition. Upon a subsequent disposition by the transferee, the dates of receipt of section 126 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:
(e) Disposition of section 126 property not specifically covered. If section 126 property is disposed of in a transaction not specifically covered under § 16A.1255-1, and this section, then the principles of section 1245 shall apply.