§1255 — Title 26 Internal Revenue Code | U.S. Code

Summary

If you sell or otherwise give up property that was bought or improved with payments you didn’t have to include in income under section 126, part of your gain may be taxed as ordinary income. The amount taxed is the smaller of: (1) the applicable percentage of the total tax-free payments used for the property, or (2) the profit you made (sale price or fair market value minus the property’s adjusted basis). "Section 126 property" means property acquired or changed using those excluded payments. If you dispose of the property within 10 years, the applicable percentage is 100%. After 10 years, the percentage drops by 10% for each year or part of a year past 10, but not below zero. The Treasury can make rules like those that apply to section 1245 property. For rules about charitable deductions and certain partner transactions (sections 170(e) and 751(c)), amounts treated as ordinary income under this rule are handled the same as ordinary income under section 1245.

Title 26, §1255

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(a)(1)Except as otherwise provided in this section, if section 126 property is disposed of, the lower of—

(A)the applicable percentage of the aggregate payments, with respect to such property, excluded from gross income under section 126, or

(B)the excess of—

(i)the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such section 126 property (in the case of any other disposition), over

(ii)the adjusted basis of such property,

(2)For purposes of this section, “section 126 property” means any property acquired, improved, or otherwise modified by the application of payments excluded from gross income under section 126.

(3)For purposes of this section, if section 126 property is disposed of less than 10 years after the date of receipt of payments excluded from gross income under section 126, the applicable percentage is 100 percent. If section 126 property is disposed of more than 10 years after such date, the applicable percentage is 100 percent reduced (but not below zero) by 10 percent for each year or part thereof in excess of 10 years such property was held after the date of receipt of the payments.

(b)Under regulations prescribed by the Secretary—

(1)rules similar to the rules applicable under section 1245 shall be applied for purposes of this section, and

(2)for purposes of section 170(e) and 751(c), amounts treated as ordinary income under this section shall be treated in the same manner as amounts treated as ordinary income under section 1245.

Notes & Related Subsidiaries

Editorial Notes

Amendments

2018—Subsec. (b)(2). Pub. L. 115–141 substituted “170(e)” for “170(e),”. 2003—Subsec. (b)(2). Pub. L. 108–27 struck out “, 341(e)(12),” after “170(e)”. 1988—Subsec. (b)(2). Pub. L. 100–647 amended Pub. L. 99–514, § 511(d)(2)(A), see 1986 Amendment note below. 1986—Subsec. (b)(2). Pub. L. 99–514, § 511(d)(2)(A), as amended by Pub. L. 100–647, struck out “163(d),” after “sections”. Pub. L. 99–514, § 631(e)(14), struck out “453B(d)(2)” after “341(e)(12),”. 1980—Subsec. (a)(1)(B). Pub. L. 96–222, § 105(a)(7)(B), inserted following cl. (ii) provisions requiring that such gain be recognized notwithstanding any other provision of this subtitle, except that this section shall not apply to the extent such gain is recognized as ordinary income under any other provision of this part. Subsec. (b)(2). Pub. L. 96–471 substituted “453B(d)(2)” for “453(d)(4)(B)”. Pub. L. 96–222, § 105(a)(7)(D), inserted “for purposes of section 163(d), 170(e), 341(e)(12), 453(d)(4)(B), and 751(c)” before “amounts treated as”.

Statutory Notes and Related Subsidiaries

Effective Date

of 2003 AmendmentAmendment by Pub. L. 108–27 applicable, except as otherwise provided, to taxable years beginning after Dec. 31, 2002, see section 302(f) of Pub. L. 108–27, set out as an Effective and Termination Dates of 2003 Amendment note under section 1 of this title.

Effective Date

of 1988 AmendmentAmendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

Effective Date

of 1986 AmendmentAmendment by section 511(d)(2)(A) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, see section 511(e) of Pub. L. 99–514, set out as a note under section 163 of this title. Amendment by section 631(e)(14) of Pub. L. 99–514 applicable to any distribution in complete liquidation, and any sale or exchange, made by a corporation after July 31, 1986, unless such corporation is completely liquidated before Jan. 1, 1987, any transaction described in section 338 of this title for which the acquisition date occurs after Dec. 31, 1986, and any distribution, not in complete liquidation, made after Dec. 31, 1986, with exceptions and special and transitional rules, see section 633 of Pub. L. 99–514, set out as an

Effective Date

note under section 336 of this title.

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of 1980

Amendments

For

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of amendment by Pub. L. 96–471, see section 6(a)(1) of Pub. L. 96–471, set out as an

Effective Date

note under section 453 of this title. Amendment by Pub. L. 96–222 effective, except as otherwise provided, as if it had been included in the provisions of the Revenue Act of 1978, Pub. L. 95–600, to which such amendment relates, see section 201 of Pub. L. 96–222, set out as a note under section 32 of this title.

Effective Date

Section effective with respect to grants made under the programs after Sept. 30, 1979, see section 543(d) of Pub. L. 95–600, set out as a note under section 126 of this title.

§1255 Gain from disposition of section 126 property

Summary

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