[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: 26CFR1.1245-5]

[Page 369]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1245-5  Adjustments to basis.

    In order to reflect gain recognized under section 1245(a)(1), the 
following adjustments to the basis of property shall be made:
    (a) Property acquired in like kind exchange or involuntary 
conversion. (1) If property is acquired in a transaction to which 
section 1245(b)(4) applies, its basis shall be determined under the 
rules of section 1031(d) or 1033(c).
    (2) The provisions of this paragraph may be illustrated by the 
following example:

    Example: Jones exchanges property A, which is section 1245 property 
with an adjusted basis of $10,000, for property B, which has a fair 
market value of $9,000, and property C, which has a fair market value of 
$3,500, in a like kind exchange as to which no gain would be recognized 
under section 1031(a). Upon the exchange $2,500 gain is recognized under 
section 1245(a)(1), since property C is not section 1245 property. See 
section 1245(b)(4). Under the rules of section 1031(d), the basis of the 
properties received in the exchange is $12,500 (i.e., the basis of 
property transferred, $10,000, plus the amount of gain recognized, 
$2,500), of which the amount allocated to property C is $3,500 (the fair 
market value thereof), and the residue, $9,000, is allocated to property 
B.

    (b) Sections 1071 and 1081 transactions. (1) If property is acquired 
in a transaction to which section 1071 and paragraph (e)(1) of Sec. 
1.1245-4 (relating to limitation for section 1071 transactions, etc.) 
apply, its basis shall be determined in accordance with the principles 
of paragraph (a) of this section.
    (2) If the basis of property, other than section 1245 property, is 
reduced pursuant to either an election under section 1071 or the 
application of section 1082(a)(2), then the basis of the property shall 
be increased to the extent of the gain recognized under section 
1245(a)(1) by reason of the application of paragraph (e)(1)(iii) of 
Sec. 1.1245-4.

[T.D. 6832, 30 FR 8584, July 7, 1965]