§1254 Gain From Disposition of Interest in Oil, Gas, Geothermal, or Other Mineral Properties

Summary

If you dispose of a "section 1254 property," part of your gain must be treated as ordinary income. The ordinary amount is the smaller of two things: (1) the total of certain expenditures you (or someone else) deducted under sections 263, 616, or 617 that would otherwise have been part of the property's basis, plus any depletion deductions under section 611 that lowered the basis; or (2) the gain computed as either the amount realized (for a sale, exchange, or involuntary conversion) or the fair market value (for any other kind of disposition) minus the property's adjusted basis. That ordinary income is recognized even if other tax rules would say otherwise. If you sell just part of the property, the rules generally allocate the full related expenditures to the part sold, except an undivided interest gets a proportional share. You may prove to the IRS that some expenditures do not relate to the part sold. The expenditures are adjusted for amounts included under section 617(b)(1)(A). The IRS will issue rules like those in sections 617(g), 1245(b)–(c), and 751 to explain details, including special rules for sales of S‑corporation stock.