[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: 26CFR1.1274-5]

[Page 538-539]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1274-5  Assumptions.

    (a) In general. Section 1274 does not apply to a debt instrument if 
the debt instrument is assumed, or property is taken subject to the debt 
instrument, in connection with a sale or exchange of property, unless 
the terms of the debt instrument, as part of the sale or exchange, are 
modified in a manner that would constitute an exchange under section 
1001.
    (b) Modifications of debt instruments--(1) In general. Except as 
provided in paragraph (b)(2) of this section, if a debt instrument is 
assumed, or property is taken subject to a debt instrument, in 
connection with a sale or exchange of property, the terms of the debt 
instrument are modified as part of the sale or exchange, and the 
modification triggers an exchange under section 1001, the modification 
is treated as a separate transaction taking place immediately before the 
sale or exchange and is attributed to the seller of the property. For 
purposes of this paragraph (b), a debt instrument is not considered to 
be modified as part of the sale or exchange unless the seller knew or 
had reason to know about the modification.
    (2) Election to treat buyer as modifying the debt instrument--(i) In 
general. Rather than having the rules in paragraph (b)(1) of this 
section apply, the seller and buyer may jointly elect to treat the 
transaction as one in which the buyer first assumed the original 
(unmodified) debt instrument and then subsequently modified the debt 
instrument. For this purpose, the modification is treated as a separate 
transaction taking place immediately after the sale or exchange.
    (ii) Time and manner of making the election. The buyer and seller 
make the election under paragraph (b)(2)(i) of this section by jointly 
signing a statement that includes the names, addresses, and taxpayer 
identification numbers of the seller and buyer, and a clear

[[Page 539]]

indication that the election is being made under paragraph (b)(2)(i) of 
this section. Both the buyer and the seller must sign this statement not 
later than the earlier of the last day (including extensions) for filing 
the Federal income tax return of the buyer or seller for the taxable 
year in which the sale or exchange of the property occurs. The buyer and 
seller should attach this signed statement (or a copy thereof) to their 
timely filed Federal income tax returns.
    (c) Wraparound indebtedness. For purposes of paragraph (a) of this 
section, the issuance of wraparound indebtedness is not considered an 
assumption.
    (d) Consideration attributable to assumed debt. If, as part of the 
consideration for the sale or exchange of property, the buyer assumes, 
or takes the property subject to, an indebtedness that was issued with 
OID (including a debt instrument issued in a prior sale or exchange to 
which section 1274 applied), the portion of the buyer's basis in the 
property and the seller's amount realized attributable to the debt 
instrument equals the adjusted issue price of the debt instrument as of 
the date of the sale or exchange.

[T.D. 8517, 59 FR 4824, Feb. 2, 1994]