[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: 26CFR1.1055-4]

[Page 175-176]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1055-4  Basis of redeemable ground rent reserved or created in 
connection with transfers of real property before April 11, 1963.

    (a) In general. In the case of a redeemable ground rent created or 
reserved in connection with a transfer, occurring before April 11, 1963, 
of the right to hold real property subject to liabilities under such 
ground rent, the basis of such ground rent on or after April 11, 1963, 
in the hands of the person who reserved or created the ground rent is 
the amount which was taken into account in respect of such ground rent 
in computing the amount realized from the transfer of such real 
property. Thus, if no such amount was taken into account, such basis 
shall be determined without regard to section 1055. (See section 
1055(b)(3).)
    (b) The provisions of this section may be illustrated by the 
following examples:

    Example 1. The taxpayer, who was in the business of building houses, 
purchased an undeveloped lot of land for $500 and built a house thereon 
at a cost of $10,000. Subsequently, he transferred the right to hold the 
lot improved by the house for a consideration of $12,000, and an annual 
ground rent for such property of $120 which was redeemable for a 
redemption price of $2,000. The taxpayer reported a $2,000 gain on the 
transfer, treating the amount realized as $12,000 and his cost allocable 
to the interest transferred as $10,000. Since the builder did not take 
the redeemable ground rent into account in computing gain on the 
transfer, his basis for such ground rent is $500 (the cost of the land 
not offset against the consideration received for the transfer). Thus, 
if he subsequently sells the redeemable ground rent (or if it is 
redeemed from him) for $2,000, he has no gain of $1,500 in the year of 
sale (or redemption).
    Example 2. Assume the same facts as in Example 1 except that the 
builder reported a gain of $3,500 on the transfer, treating the amount 
realized as $14,000 ($12,000 cash plus $2,000 for the redeemable ground 
rent) and his costs as $10,500 ($10,000 for the house and $500 for the 
lot). Since the taxpayer took the entire amount of the redeemable ground 
rent into account in computing his gain, his basis for such ground rent 
is $2,000. Thus, if he subsequently sells the redeemable ground rent (or 
if it is redeemed from him) for $2,000, he has no gain or loss on the 
transaction.
    Example 3. Assume the same facts as in Example 1 except that the 
builder reported a gain of $3,000 on the transfer. He computed this gain 
by treating the amount realized as $12,000 but treating his cost 
allocable to the interest transferred as $12,000/$14,000ths of his total 
$10,500 cost, or $9,000. Since the builder still has remaining $1,500 of 
unallocated cost, his basis for the redeemable ground rent is $1,500. 
Thus, if he subsequently sells the redeemable ground rent (or if it is 
redeemed from him) for $2,000, he has

[[Page 176]]

a gain of $500 in the year of sale (or redemption).

[T.D. 6821, 30 FR 6217, May 4, 1965]