[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1014-5]

[Page 46-49]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1014-5  Gain or loss.

    (a) Sale or other disposition of a life interest, remainder 
interest, or other interest in property acquired from a decedent. (1)

[[Page 47]]

Except as provided in paragraph (b) of this section with respect to the 
sale or other disposition after October 9, 1969, of a term interest in 
property, gain or loss from a sale or other disposition of a life 
interest, remainder interest, or other interest in property acquired 
from a decedent is determined by comparing the amount of the proceeds 
with the amount of that part of the adjusted uniform basis which is 
assignable to the interest so transferred. The adjusted uniform basis is 
the uniform basis of the entire property adjusted to the date of sale or 
other disposition of any such interest as required by sections 1016 and 
1017. The uniform basis is the unadjusted basis of the entire property 
determined immediately after the decedent's death under the applicable 
sections of part II of subchapter O of chapter 1 of the Code.
    (2) Except as provided in paragraph (b) of this section, the proper 
measure of gain or loss resulting from a sale or other disposition of an 
interest in property acquired from a decedent is so much of the increase 
or decrease in the value of the entire property as is reflected in such 
sale or other disposition. Hence, in ascertaining the basis of a life 
interest, remainder interest, or other interest which has been so 
transferred, the uniform basis rule contemplates that proper adjustments 
will be made to reflect the change in relative value of the interests on 
account of the passage of time.
    (3) The factors set forth in the tables contained in Sec. 20.2031-7 
or, for certain prior periods, Sec. 20.2031-7A, of part 20 of this 
chapter (Estate Tax Regulations) shall be used in the manner provided 
therein in determining the basis of the life interest, the remainder 
interest, or the term certain interest in the property on the date such 
interest is sold. The basis of the life interest, the remainder 
interest, or the term certain interest is computed by multiplying the 
uniform basis (adjusted to the time of the sale) by the appropriate 
factor. In the case of the sale of a life interest or a remainder 
interest, the factor used is the factor (adjusted where appropriate) 
which appears in the life interest or the remainder interest column of 
the table opposite the age (on the date of the sale) of the person at 
whose death the life interest will terminate. In the case of the sale of 
a term certain interest, the factor used is the factor (adjusted where 
appropriate) which appears in the term certain column of the table 
opposite the number of years remaining (on the date of sale) before the 
term certain interest will terminate.
    (b) Sale or other disposition of certain term interests. In 
determining gain or loss from the sale or other disposition after 
October 9, 1969, of a term interest in property (as defined in paragraph 
(f)(2) of Sec. 1.1001-1) the adjusted basis 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 the 
basis of property acquired by gift or by a transfer in trust), that part 
of the adjusted uniform basis assignable under the rules of paragraph 
(a) of this section to the interest sold or otherwise disposed of shall 
be disregarded to the extent and in the manner provided by section 
1001(e) and paragraph (f) of Sec. 1.1001-1.
    (c) Illustrations. The application of this section may be 
illustrated by the following examples, in which references are made to 
the actuarial tables contained in part 20 of this chapter (Estate Tax 
Regulations):

    Example 1. Securities worth $500,000 at the date of decedent's death 
on January 1, 1971, are bequeathed to his wife, W, for life, with 
remainder over to his son, S. W is 48 years of age when the life 
interest is acquired. The estate does not elect the alternate valuation 
allowed by section 2032. By reference to Sec. 20.2031-7A(c), the life 
estate factor for age 48, female, is found to be 0.77488 and the 
remainder factor for such age is found to be 0.22512. Therefore, the 
present value of the portion of the uniform basis assigned to W's life 
interest is $387,440 ($500,000 x 0.77488), and the present value of the 
portion of the uniform basis assigned to S's remainder interest is 
$112,560 ($500,000 x 0.22512). W sells her life interest to her nephew, 
A, on February 1, 1971, for $370,000, at which time W is still 48 years 
of age. Pursuant to section 1001(e), W realizes no loss; her gain is 
$370,000, the amount realized from the sale. A has a basis of $370,000 
which he can recover by amortization deductions over W's life 
expectancy.
    Example 2. The facts are the same as in example (1) except that W 
retains the life interest for 12 years, until she is 60 years of age, 
and then sells it to A on February 1, 1983, when the fair market value 
of the securities has increased to $650,000. By reference

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to Sec. 20.2031-7A(c), the life estate factor for age 60, female, is 
found to be 0.63226 and the remainder factor for such age is found to be 
0.36774. Therefore, the present value on February 1, 1983, of the 
portion of the uniform basis assigned to W's life interest is $316,130 
($500,000 x 0.63226) and the present value on that date of the portion 
of the uniform basis assigned to S's remainder interest is $183,870 
($500,000 x 0.36774). W sells her life interest for $410,969, that being 
the commuted value of her remaining life interest in the securities as 
appreciated ($650,000 x 0.63226). Pursuant to section 1001(e), W's gain 
is $410,969, the amount realized. A has a basis of $410,969 which he can 
recover by amortization deductions over W's life expectancy.
    Example 3. Unimproved land having a fair market value of $18,800 at 
the date of the decedent's death on January 1, 1970, is devised to A, a 
male, for life, with remainder over to B, a female. The estate does not 
elect the alternate valuation allowed by section 2032. On January 1, 
1971, A sells his life interest to S for $12,500. S is not related to A 
or B. At the time of the sale, A is 39 years of age. By reference to 
Sec. 20.2031-7A(c), the life estate factor for age 39, male, is found 
to be 0.79854. Therefore, the present value of the portion of the 
uniform basis assigned to A's life interest is $15,012.55 ($18,800 x 
0.79854). This portion is disregarded under section 1001(e). A realizes 
no loss; his gain is $12,500, the amount realized. S has a basis of 
$12,500 which he can recover by amortization deductions over A's life 
expectancy.
    Example 4. The facts are the same as in example (3) except that on 
January 1, 1971, A and B jointly sell the entire property to S for 
$25,000 and divide the proceeds equally between them. A and B are not 
related, and there is no element of gift or compensation in the 
transaction. By reference to Sec. 20.2031-7A(c), the remainder factor 
for age 39, male, is found to be 0.20146. Therefore, the present value 
of the uniform basis assigned to B's remainder interest is $3,787.45 
($18,800 x 0.20146). On the sale A realizes a loss of $2,512.55 
($15,012.55 less $12,500), the portion of the uniform basis assigned to 
his life interest not being disregarded by reason of section 1001(e)(3). 
B's gain on the sale is $8,712.55 ($12,500 less $3,787.45). S has a 
basis in the entire property of $25,000, no part of which, however, can 
be recovered by amortization deductions over A's life expectancy.
    Example 5. (a) Nondepreciable property having a fair market value of 
$54,000 at the date of decedent's death on January 1, 1971, is devised 
to her husband, H, for life and, after his death, to her daughter, D, 
for life, with remainder over to her grandson, G. The estate does not 
elect the alternate valuation allowed by section 2032. On January 1, 
1973, H sells his life interest to D for $32,000. At the date of the 
sale, H is 62 years of age, and D is 45 years of age. By reference to 
Sec. 20.2031-7A(c), the life estate factor for age 62, male, is found 
to be 0.52321. Therefore, the present value on January 1, 1973, of the 
portion of the adjusted uniform basis assigned to H's life interest is 
$28,253 ($54,000 x 0.52321). Pursuant to section 1001(e), H realizes no 
loss; his gain is $32,000, the amount realized from the sale. D has a 
basis of $32,000 which she can recover by amortization deductions over 
H's life expectancy.
    (b) On January 1, 1976, D sells both life estates to G for $40,000. 
During each of the years 1973 through 1975, D is allowed a deduction for 
the amortization of H's life interest. At the date of the sale H is 65 
years of age, and D is 48 years of age. For purposes of determining gain 
or loss on the sale by D, the portion of the adjusted uniform basis 
assigned to H's life interest and the portion assigned to D's life 
interest are not taken into account under section 1001(e). However, 
pursuant to Sec. 1.1001-1(f)(1), D's cost basis in H's life interest, 
minus deductions for the amortization of such interest, is taken into 
account. On the sale, D realizes gain of $40,000 minus an amount which 
is equal to the $32,000 cost basis (for H's life estate) reduced by 
amortization deductions. G is entitled to amortize over H's life 
expectancy that part of the $40,000 cost which is attributable to H's 
life interest. That part of the $40,000 cost which is attributable to 
D's life interest is not amortizable by G until H dies.
    Example 6. Securities worth $1,000,000 at the date of decedent's 
death on January 1, 1971, are bequeathed to his wife, W, for life, with 
remainder over to his son, S. W is 48 years of age when the life 
interest is acquired. The estate does not elect the alternate valuation 
allowed by section 2032. By reference to Sec. 20.2031-7A(c), the life 
estate factor for age 48, female, is found to be 0.77488, and the 
remainder factor for such age is found to be 0.22512. Therefore, the 
present value of the portion of the uniform basis assigned to W's life 
interest is $774,880 ($1,000,000 x 0.77488), and the present value of 
the portion of the uniform basis assigned to S's remainder interest is 
$225,120 ($1,000,000 x 0.22512). On February 1, 1971, W transfers her 
life interest to corporation X in exchange for all of the stock of X 
pursuant to a transaction in which no gain or loss is recognized by 
reason of section 351. On February 1, 1972, W sells all of her stock in 
X to S for $800,000. Pursuant to section 1001(e) and Sec. 1.1001-
1(f)(2), W realizes no loss; her gain is $800,000, the amount realized 
from the sale. On February 1, 1972, X sells to N for $900,000 the life 
interest transferred to it by W. Pursuant to section 1001(e) and Sec. 
1.1001-1(f)(1), X realizes no loss; its gain is $900,000, the amount 
realized from the sale. N has a basis of $900,000 which he can recover

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by amortization deductions over W's life expectancy.

[T.D. 7142, 36 FR 18951, Sept. 24, 1971, as amended by T.D. 8540, 59 FR 
30102, June 10, 1994]