[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: 26CFR1.1019-1]

[Page 78]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1019-1  Property on which lessee has made improvements.

    In any case in which a lessee of real property has erected buildings 
or made other improvements upon the leased property and the lease is 
terminated by forfeiture or otherwise resulting in the realization by 
such lessor of income which, were it not for the provisions of section 
109, would be includible in gross income of the lessor, the amount so 
excluded from gross income shall not be taken into account in 
determining the basis or the adjusted basis of such property or any 
portion thereof in the hands of the lessor. If, however, in any taxable 
year beginning before January 1, 1942, there has been included in the 
gross income of the lessor an amount representing any part of the value 
of such property attributable to such buildings or improvements, the 
basis of each portion of such property shall be properly adjusted for 
the amount so included in gross income. For example, A leased in 1930 to 
B for a period of 25 years unimproved real property and in accordance 
with the terms of the lease B erected a building on the property. It was 
estimated that upon expiration of the lease the building would have a 
depreciated value of $50,000, which value the lessor elected to report 
(beginning in 1931) as income over the term of the lease. This method of 
reporting was used until 1942. In 1952 B forfeits the lease. The amount 
of $22,000 reported as income by A during the years 1931 to 1941, 
inclusive, shall be added to the basis of the property represented by 
the improvements in the hands of A. If in such case A did not report 
during the period of the lease any income attributable to the value of 
the building erected by the lessee and the lease was forfeited in 1940 
when the building was worth $75,000, such amount, having been included 
in gross income under the law applicable to that year, is added to the 
basis of the property represented by the improvements in the hands of A. 
As to treatment of such property for the purposes of capital gains and 
losses, see subchapter P (section 1201 and following), chapter 1 of the 
Code.