26 U.S.C. § 1250 — Gain from dispositions of certain depreciable realty

(a) General rule. Except as this section provides otherwise:

(1) Additional depreciation after December 31, 1975.

(A) In general. If section 1250 property is disposed of after December 31, 1975, the applicable percentage of the lower of the following amounts is treated as ordinary-income gain, and the gain is recognized despite other provisions of this subtitle:

(i) the part of the property’s “additional depreciation,” as defined in subsection (b)(1) or (4), attributable to periods after December 31, 1975; or

(ii) the amount realized for a sale, exchange, or involuntary conversion, or the property’s fair market value for any other disposition, minus the property’s adjusted basis.

(B) Applicable percentage. For subparagraph (A), the “applicable percentage” is—

(i) for section 1250 property with a mortgage insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by a direct loan or tax abatement under similar State or local laws, where the owner is subject to the restrictions in section 1039(b)(1)(B), as that provision existed the day before the Revenue Reconciliation Act of 1990 was enacted: 100 percent minus 1 percentage point for each full month the property was held after the date on which it had been held 100 full months;

(ii) for dwelling units that, on average, were held for occupancy by families or individuals eligible for subsidies under section 8 of the United States Housing Act of 1937, as amended, or under State or local laws authorizing similar subsidy levels for lower-income families: 100 percent minus 1 percentage point for each full month the property was held after the date on which it had been held 100 full months;

(iii) for section 1250 property for which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k): 100 percent minus 1 percentage point for each full month over 100 full months after the date the property was placed in service;

(iv) for section 1250 property for which a loan was made or insured under title V of the Housing Act of 1949: 100 percent minus 1 percentage point for each full month the property was held after the date on which it had been held 100 full months; and

(v) for all other section 1250 property: 100 percent.

If, on average, at least 85 percent of the dwelling units in a building, or in a portion of a building devoted to dwelling units, are units described in clause (ii), the building or portion is treated as property described in clause (ii). Clauses (i), (ii), and (iv) do not apply to additional depreciation described in subsection (b)(4) that was allowed under section 167(k).

(2) Additional depreciation after December 31, 1969, and before January 1, 1976.

(A) In general. If section 1250 property is disposed of after December 31, 1969, and the amount in paragraph (1)(A)(ii) is greater than the amount in paragraph (1)(A)(i), the applicable percentage of the lower of the following amounts is also treated as ordinary-income gain, recognized despite other subtitle provisions:

(i) the part of additional depreciation attributable to periods after December 31, 1969, and before January 1, 1976; or

(ii) the amount in paragraph (1)(A)(ii) minus the amount in paragraph (1)(A)(i).

(B) Applicable percentage. The applicable percentage is—

(i) for property disposed of under a written contract that was binding on the owner on July 24, 1969, and remained binding afterward: 100 percent minus 1 percentage point for each full month the property was held after the date on which it had been held 20 full months;

(ii) for property in the mortgage, State-or-local-financing, or section 1039(b)(1)(B) restriction category described in paragraph (1)(B)(i): 100 percent minus 1 percentage point for each full month after the date on which the property had been held 20 full months;

(iii) for “residential rental property,” as defined in section 167(j)(2)(B), other than property covered by clauses (i) and (ii): 100 percent minus 1 percentage point for each full month after the date on which the property had been held 100 full months;

(iv) for property for which a rehabilitation-expenditure depreciation deduction was allowed under section 167(k): 100 percent minus 1 percentage point for each full month over 100 full months after the property was placed in service; and

(v) for all other section 1250 property: 100 percent.

Clauses (i), (ii), and (iii) do not apply to additional depreciation described in subsection (b)(4).

(3) Additional depreciation before January 1, 1970.

(A) In general. If section 1250 property is disposed of after December 31, 1963, and the amount in paragraph (1)(A)(ii) is greater than the amounts in paragraphs (1)(A)(i) and (2)(A)(i) added together, the applicable percentage of the lower of the following amounts is also treated as ordinary-income gain, recognized despite other subtitle provisions:

(i) the part of additional depreciation attributable to periods before January 1, 1970; or

(ii) the amount in paragraph (1)(A)(ii) minus the amounts in paragraphs (1)(A)(i) and (2)(A)(i) added together.

(B) Applicable percentage. The applicable percentage is 100 percent minus 1 percentage point for each full month the property was held after the date on which it had been held 20 full months.

(4) Special rule. Any reference in this subsection to section 167(k) or 167(j)(2)(B) means that section as it existed the day before the Revenue Reconciliation Act of 1990 was enacted.

(5) Cross reference. Section 291(a)(1) provides for a reduction in the capital-gain treatment under this section for corporations.

(b) Additional depreciation defined. For this section:

(1) In general. “Additional depreciation” means the depreciation adjustments for property. If the property was held more than 1 year, it means those adjustments only to the extent they exceed the depreciation adjustments that would have resulted if the adjustments for each taxable year^* had been determined under the straight-line method.

(2) Property held by lessee. For a lessee calculating the depreciation adjustments for a building or other improvement erected or made on leased property, or for the cost of acquiring the lease, the lease period includes all renewal periods. A “renewal period” means a period for which the lease may be renewed, extended, or continued under an option the lessee may exercise. Including renewal periods cannot extend the period used by more than two-thirds of the period on which the allowed depreciation adjustments were based.

(3) Depreciation adjustments. “Depreciation adjustments” means all adjustments attributable to periods after December 31, 1963, reflected in the property’s adjusted basis because of deductions allowed or allowable to the taxpayer^* or another person for exhaustion, wear and tear, obsolescence, or amortization. It does not include amortization under section 168 as that section existed before its repeal by the Tax Reform Act of 1976, section 169, section 185 as it existed before its repeal by the Tax Reform Act of 1986, section 188 as it existed before its repeal by the Revenue Reconciliation Act of 1990, section 190, or section 193. If the taxpayer proves with adequate records or other sufficient evidence that the deduction allowed for a period was less than the amount allowable, the amount allowed is used for that period.

(4) Additional depreciation attributable to rehabilitation expenditures. “Additional depreciation” also includes, for section 1250 property for which a depreciation or amortization deduction for rehabilitation expenditures was allowed under section 167(k), as that section existed the day before the Revenue Reconciliation Act of 1990 was enacted, or under section 191, as that section existed before its repeal by the Economic Recovery Tax Act of 1981, the depreciation or amortization adjustments allowed under that section to the extent attributable to the property. If the property was held more than 1 year after the allowed rehabilitation expenditures were incurred, only the part exceeding the depreciation adjustments that would have resulted under the straight-line method is included. That comparison must ignore the useful life allowed under section 167(k), as it then existed, or section 191, as it existed before repeal.

(5) Method of computing straight-line adjustments. For paragraph (1), the straight-line depreciation adjustments for a taxable year are determined—

(A) for property to which section 168 applies, by determining the adjustments that would have resulted if the taxpayer had elected the straight-line method for that year using the recovery period applicable to the property; and

(B) for property to which section 168 does not apply, if a useful life or salvage value was used to determine the allowable deduction for a taxable year, by using that life or value.

(c) Section 1250 property. “Section 1250 property” means real property^*, other than section 1245 property as defined in section 1245(a)(3), that is or has been property of a character subject to the depreciation allowance under section 167.

(d) Exceptions and limitations.

(1) Gifts. Subsection (a) does not apply to a gift.

(2) Transfers at death. Except as provided in section 691, concerning income in respect of a decedent, subsection (a) does not apply to a transfer at death.

(3) Certain tax-free transactions. If the transferee’s basis is determined by reference to the transferor’s basis because of section 332, 351, 361, 721, or 731, the gain counted under subsection (a) cannot exceed the gain recognized to the transferor on the transfer, determined without regard to this section. Except under paragraph (6), this paragraph does not apply to a disposition to an organization exempt from this chapter’s tax, other than a cooperative described in section 521.

(4) Like-kind exchanges; involuntary conversions, and similar transactions.

(A) Recognition limit. If gain would otherwise not be recognized in whole or in part under section 1031 or 1033, the gain counted under subsection (a) cannot exceed the greater of—

(i) the gain recognized on the disposition, determined without regard to this section, increased as provided in subparagraph (B); or

(ii) the amount determined under subparagraph (C).

(B) Increase for certain stock^*. The increase is the fair market value of stock purchased in a corporation^* if, without this paragraph, the purchase would cause gain not to be recognized under section 1033(a)(2)(A).

(C) Adjustment where insufficient section 1250 property is acquired. The amount is the excess of—

(i) the gain that, without this paragraph, would be counted under subsection (a); over

(ii) the fair market value, or the cost for a transaction under section 1033(a)(2), of the section 1250 property acquired.

(D) Basis of property acquired. For property purchased in a section 1033(a)(2) transaction, when applying section 1033(b)(2), the rule referred to there is first applied only to section 1250 property and gain not counted under subsection (a) because of this paragraph. It is then applied to all purchased property to which that rule applies and to the remaining gain not recognized, treating the cost of the section 1250 property as its basis computed in the first step. For property acquired in another transaction covered by this paragraph, the Secretary’s regulations must apply consistent rules.

(E) Additional depreciation for disposed property. In a section 1031 or 1033 transaction, the additional depreciation for the acquired section 1250 property attributable to the section 1250 property disposed of equals the gain not counted under subsection (a) because of this paragraph.

(5) Property distributed by a partnership^* to a partner^*.

(A) In general. The basis of section 1250 property distributed by a partnership to a partner is treated as determined by reference to the partnership’s adjusted basis in the property.

(B) Additional depreciation. For that property, the additional depreciation attributable to periods before the partnership’s distribution equals—

(i) the gain subsection (a) would have covered if the partnership had sold the property immediately before distribution at its fair market value then, using a 100-percent applicable percentage; minus

(ii) if section 751(b) applied to any part of that gain, the gain section 751(b) would have covered if the applicable percentage had been 100 percent.

(6) Transfers to tax-exempt organizations where property will be used in unrelated business.

(A) In general. The second sentence of paragraph (3) does not apply to a disposition of section 1250 property to an organization described in section 511(a)(2) or 511(b)(2) if, immediately afterward, the organization uses the property in an unrelated trade or business^* as defined in section 513.

(B) Later change in use. If property whose gain was not recognized because of subparagraph (A) stops being used in the acquiring organization’s unrelated trade or business, the organization is treated for this section as having disposed of the property on the date use stopped.

(7) Foreclosure dispositions. If the taxpayer disposes of section 1250 property through a bid at foreclosure, or through an agreement or legal process after a default on debt secured by the property, the applicable percentage under subsection (a)(1)(B), (2)(B), or (3)(B), as appropriate, is determined as if the taxpayer stopped holding the property when the proceedings leading to the disposition began. If there were no proceedings, the percentage is determined as if the taxpayer stopped holding the property on the date the Secretary’s regulations determine that the agreement or legal process leading to the disposition began.

(e) Holding period. Section 1223 does not apply when determining the applicable percentage. The holding period is determined as follows:

(1) Beginning of holding period. It begins—

(A) for property acquired by the taxpayer, on the day after acquisition; or

(B) for property constructed, reconstructed, or erected by the taxpayer, on the first day of the month in which the property is placed in service.

(2) Property with transferred basis. If the basis of property acquired in a transaction described in paragraph (1), (2), or (3) of subsection (d) is determined by reference to the transferor’s basis, the transferee’s holding period includes the transferor’s holding period.

(f) Special rules for property that is substantially improved.

(1) Amount treated as ordinary income. If a disposition treats section 1250 property as consisting of more than one element under paragraph (3), the ordinary income counted under subsection (a) is the sum of the amounts determined under paragraph (2).

(2) Ordinary income attributable to an element. For each element, the amount is the sum of amounts determined for the periods listed in subsection (a). For each period, multiply—

(A) the amount that has the same ratio to the applicable lower amount in subsection (a)(1)(A), (a)(2)(A), or (a)(3)(A), as appropriate, as the element’s additional depreciation for that period has to the additional depreciation for all elements for that period; by

(B) the element’s applicable percentage for that period.

For this paragraph, determine each element as if it were separate property.

(3) Property consisting of more than one element. Each of the following is treated as a separate element:

(A) each separate improvement;

(B) each unit of section 1250 property placed in service before the property was completed, if the units are distinguished from improvements; and

(C) the remaining property not covered by subparagraphs (A) and (B).

(4) Property that is substantially improved.

(A) In general. A “separate improvement” is each improvement added to the property’s capital account during the 36-month period ending on the last day of a taxable year, but only if the total added during that period exceeds the greatest of—

(i) 25 percent of the property’s adjusted basis;

(ii) 10 percent of the property’s adjusted basis calculated without the adjustments in section 1016(a)(2) and (3); or

(iii) $5,000.

For clauses (i) and (ii), determine adjusted basis at the beginning of the first day of the 36-month period or at the beginning of the property’s holding period under subsection (e), whichever is later.

(B) Exception. Improvements made in a taxable year count under subparagraph (A) only if the total added to the property’s capital account during that taxable year exceeds the greater of—

(i) $2,000; or

(ii) 1 percent of the adjusted basis described in subparagraph (A)(ii), determined at the beginning of that taxable year.

If the amount added for a separate improvement does not exceed the greater of those amounts, the improvement is treated as placed in service on the first day of the calendar month closest to the middle of the taxable year.

(C) Improvement. An “improvement” is an addition to the capital account for section 1250 property after its initial acquisition or after completion of the property.

(g) Adjustments to basis. The Secretary^* must prescribe regulations needed to adjust property’s basis to reflect gain recognized under subsection (a).

(h) Application of section. This section applies despite any other provision of this subtitle.