[Code of Federal Regulations]
[Title 26, Volume 6]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.453-12]
[Page 135-138]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
PART 1_INCOME TAXES--Table of Contents
Sec. 1.453-12 Allocation of unrecaptured section 1250 gain reported
on the installment method.
(a) General rule. Unrecaptured section 1250 gain, as defined in
section 1(h)(7), is reported on the installment method if that method
otherwise applies under section 453 or 453A and the corresponding
regulations. If gain from an installment sale includes unrecaptured
section 1250 gain and adjusted net capital gain (as defined in section
1(h)(4)), the unrecaptured section 1250 gain is taken into account
before the adjusted net capital gain.
(b) Installment payments from sales before May 7, 1997. The amount
of unrecaptured section 1250 gain in an installment payment that is
properly taken into account after May 6, 1997, from a sale before May 7,
1997, is determined as if, for all payments properly taken into account
after the date of sale but before May 7, 1997, unrecaptured section 1250
gain had been taken into account before adjusted net capital gain.
(c) Installment payments received after May 6, 1997, and on or
before August 23, 1999. If the amount of unrecaptured
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section 1250 gain in an installment payment that is properly taken into
account after May 6, 1997, and on or before August 23, 1999, is less
than the amount that would have been taken into account under this
section, the lesser amount is used to determine the amount of
unrecaptured section 1250 gain that remains to be taken into account.
(d) Examples. In each example, the taxpayer, an individual whose
taxable year is the calendar year, does not elect out of the installment
method. The installment obligation bears adequate stated interest, and
the property sold is real property held in a trade or business that
qualifies as both section 1231 property and section 1250 property. In
all taxable years, the taxpayer's marginal tax rate on ordinary income
is 28 percent. The following examples illustrate the rules of this
section:
Example 1. General rule. This example illustrates the rule of
paragraph (a) of this section as follows:
(i) In 1999, A sells property for $10,000, to be paid in ten equal
annual installments beginning on December 1, 1999. A originally
purchased the property for $5000, held the property for several years,
and took straight-line depreciation deductions in the amount of $3000.
In each of the years 1999-2008, A has no other capital or section 1231
gains or losses.
(ii) A's adjusted basis at the time of the sale is $2000. Of A's
$8000 of section 1231 gain on the sale of the property, $3000 is
attributable to prior straight-line depreciation deductions and is
unrecaptured section 1250 gain. The gain on each installment payment is
$800.
(iii) As illustrated in the table in this paragraph (iii) of this
Example 1., A takes into account the unrecaptured section 1250 gain
first. Therefore, the gain on A's first three payments, received in
1999, 2000, and 2001, is taxed at 25 percent. Of the $800 of gain on the
fourth payment, received in 2002, $600 is taxed at 25 percent and the
remaining $200 is taxed at 20 percent. The gain on A's remaining six
installment payments is taxed at 20 percent. The table is as follows:
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Total
1999 2000 2001 2002 2003 2004-2008 gain
----------------------------------------------------------------------------------------------------------------
Installment gain................... 800 800 800 800 800 4000 8000
Taxed at 25%....................... 800 800 800 600 ......... ......... 3000
Taxed at 20%....................... ......... ......... ......... 200 800 4000 5000
Remaining to be taxed at 25%....... 2200 1400 600 ......... ......... ......... .........
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Example 2. Installment payments from sales prior to May 7, 1997.
This example illustrates the rule of paragraph (b) of this section as
follows:
(i) The facts are the same as in Example 1 except that A sold the
property in 1994, received the first of the ten annual installment
payments on December 1, 1994, and had no other capital or section 1231
gains or losses in the years 1994-2003.
(ii) As in Example 1, of A's $8000 of gain on the sale of the
property, $3000 was attributable to prior straight-line depreciation
deductions and is unrecaptured section 1250 gain.
(iii) As illustrated in the following table, A's first three
payments, in 1994, 1995, and 1996, were received before May 7, 1997, and
taxed at 28 percent. Under the rule described in paragraph (b) of this
section, A determines the allocation of unrecaptured section 1250 gain
for each installment payment after May 6, 1997, by taking unrecaptured
section 1250 gain into account first, treating the general rule of
paragraph (a) of this section as having applied since the time the
property was sold, in 1994. Consequently, of the $800 of gain on the
fourth payment, received in 1997, $600 is taxed at 25 percent and the
remaining $200 is taxed at 20 percent. The gain on A's remaining six
installment payments is taxed at 20 percent. The table is as follows:
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Total
1994 1995 1996 1997 1998 1999-2003 gain
----------------------------------------------------------------------------------------------------------------
Installment gain................... 800 800 800 800 800 4000 8000
Taxed at 28%....................... 800 800 800 ......... ......... ......... 2400
Taxed at 25%....................... ......... ......... ......... 600 ......... ......... 600
Taxed at 20%....................... ......... ......... ......... 200 800 4000 5000
Remaining to be taxed at 25%....... 2200 1400 600 ......... ......... ......... .........
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[[Page 137]]
Example 3. Effect of section 1231(c) recapture. This example
illustrates the rule of paragraph (a) of this section when there are
non-recaptured net section 1231 losses, as defined in section
1231(c)(2), from prior years as follows:
(i) The facts are the same as in Example 1, except that in 1999 A
has non-recaptured net section 1231 losses from the previous four years
of $1000.
(ii) As illustrated in the table in paragraph (iv) of this Example
3, in 1999, all of A's $800 installment gain is recaptured as ordinary
income under section 1231(c). Under the rule described in paragraph (a)
of this section, for purposes of determining the amount of unrecaptured
section 1250 gain remaining to be taken into account, the $800
recaptured as ordinary income under section 1231(c) is treated as
reducing unrecaptured section 1250 gain, rather than adjusted net
capital gain. Therefore, A has $2200 of unrecaptured section 1250 gain
remaining to be taken into account.
(iii) In the year 2000, A's installment gain is taxed at two rates.
First, $200 is recaptured as ordinary income under section 1231(c).
Second, the remaining $600 of gain on A's year 2000 installment payment
is taxed at 25 percent. Because the full $800 of gain reduces
unrecaptured section 1250 gain, A has $1400 of unrecaptured section 1250
gain remaining to be taken into account.
(iv) The gain on A's installment payment received in 2001 is taxed
at 25 percent. Of the $800 of gain on the fourth payment, received in
2002, $600 is taxed at 25 percent and the remaining $200 is taxed at 20
percent. The gain on A's remaining six installment payments is taxed at
20 percent. The table is as follows:
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Total
1999 2000 2001 2002 2003 2004-2008 gain
----------------------------------------------------------------------------------------------------------------
Installment gain................... 800 800 800 800 800 4000 8000
Taxed at ordinary rates under 800 200 ......... ......... ......... ......... 1000
section 1231(c)...................
Taxed at 25%....................... ......... 600 800 600 ......... ......... 2000
Taxed at 20%....................... ......... ......... ......... 200 800 4000 5000
Remaining non-recaptured net 200 ......... ......... ......... ......... ......... .........
section 1231 losses...............
Remaining to be taxed at 25%....... 2200 1400 600 ......... ......... ......... .........
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Example 4. Effect of a net section 1231 loss. This example
illustrates the application of paragraph (a) of this section when there
is a net section 1231 loss as follows:
(i) The facts are the same as in Example 1 except that A has section
1231 losses of $1000 in 1999.
(ii) In 1999, A's section 1231 installment gain of $800 does not
exceed A's section 1231 losses of $1000. Therefore, A has a net section
1231 loss of $200. As a result, under section 1231(a) all of A's section
1231 gains and losses are treated as ordinary gains and losses. As
illustrated in the following table, A's entire $800 of installment gain
is ordinary gain. Under the rule described in paragraph (a) of this
section, for purposes of determining the amount of unrecaptured section
1250 gain remaining to be taken into account, A's $800 of ordinary
section 1231 installment gain in 1999 is treated as reducing
unrecaptured section 1250 gain. Therefore, A has $2200 of unrecaptured
section 1250 gain remaining to be taken into
account.P(iii) In the year 2000, A has $800 of
section 1231 installment gain, resulting in a net section 1231 gain of
$800. A also has $200 of non-recaptured net section 1231 losses. The
$800 gain is taxed at two rates. First, $200 is taxed at ordinary rates
under section 1231(c), recapturing the $200 net section 1231 loss
sustained in 1999. Second, the remaining $600 of gain on A's year 2000
installment payment is taxed at 25 percent. As in Example 3, the $200 of
section 1231(c) gain is treated as reducing unrecaptured section 1250
gain, rather than adjusted net capital gain. Therefore, A has $1400 of
unrecaptured section 1250 gain remaining to be taken into account.
(iv) The gain on A's installment payment received in 2001 is taxed
at 25 percent, reducing the remaining unrecaptured section 1250 gain to
$600. Of the $800 of gain on the fourth payment, received in 2002, $600
is taxed at 25 percent and the remaining $200 is taxed at 20 percent.
The gain on A's remaining six installment payments is taxed at 20
percent. The table is as follows:
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Total
1999 2000 2001 2002 2003 2004-2008 gain
----------------------------------------------------------------------------------------------------------------
Installment gain................... 800 800 800 800 800 4000 8000
Ordinary gain under section 1231(a) 800 ......... ......... ......... ......... ......... 800
Taxed at ordinary rates under ......... 200 ......... ......... ......... ......... 200
section 1231(c)...................
Taxed at 25%....................... ......... 600 800 600 ......... ......... 2000
Taxed at 20%....................... ......... ......... ......... 200 800 4000 5000
Net section 1231 loss.............. 200 ......... ......... ......... ......... ......... .........
[[Page 138]]
Remaining to be taxed at 25%....... 2200 1400 600 ......... ......... ......... .........
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(e) Effective date. This section applies to installment payments
properly taken into account after August 23, 1999.
[T.D. 8836, 64 FR 45875, Aug. 23, 1999]