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Sec. 1.1245-5 Adjustments to basis.

     In order to reflect gain recognized under section

1245(a)(1)

, the following adjustments to the basis of property shall be made:

 

(a)

Property acquired in like kind exchange or involuntary conversion.

 

(1)

If property is acquired in a transaction to which section

1245(b)(4)

applies, its basis shall be determined under the rules of section

1031(d)

or

1033(c)

.

(2) The provisions of this paragraph may be illustrated by the following example:

 

     

Example

. Jones exchanges property A, which is section

1245

property with an adjusted basis of $10,000, for property B, which has a fair market value of $9,000, and property C, which has a fair market value of $3,500, in a like kind exchange as to which no gain would be recognized under section

1031(a)

. Upon the exchange $2,500 gain is recognized under section

1245(a)(1)

, since property C is not section

1245

property. See section

1245(b)(4)

. Under the rules of section

1031(d)

, the basis of the properties received in the exchange is $12,500 (i.e., the basis of property transferred, $10,000, plus the amount of gain recognized, $2,500), of which the amount allocated to property C is $3,500 (the fair market value thereof), and the residue, $9,000, is allocated to property B.

(b)

Sections

1071

and

1081

transactions.

 

(1)

If property is acquired in a transaction to which section

1071

and paragraph (e)(1) of section

1.1245-4

(relating to limitation for section

1071

transactions, etc.) apply, its basis shall be determined in accordance with the principles of paragraph (a) of this section.

(2) If the basis of property, other than section 1245 property, is reduced pursuant to either an election under section 1071 or the application of section 1082(a)(2), then the basis of the property shall be increased to the extent of the gain recognized under section 1245(a)(1) by reason of the application of paragraph (e)(1)(iii) of section 1.1245-4.

[T.D. 6832, 30 FR 8584, July 7, 1965]

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