Section 1.61-6 - Gains derived from dealings in property(a)In general. Gain realized on the sale or exchange of property is included in gross income, unless excluded by law. For this purpose property includes tangible items, such as a building, and intangible items, such as goodwill. Generally, the gain is the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged. The specific rules for computing the amount of gain or loss are contained in section 1001 and the regulations thereunder. When a part of a larger property is sold, the cost or other basis of the entire property shall be equitably apportioned among the several parts, and the gain realized or loss sustained on the part of the entire property sold is the difference between the selling price and the cost or other basis allocated to such part. The sale of each part is treated as a separate transaction and gain or loss shall be computed separately on each part. Thus, gain or loss shall be determined at the time of sale of each part and not deferred until the entire property has been disposed of. This rule may be illustrated by the following examples: Example 1. A, a dealer in real estate, acquires a 10-acre tract for $10,000, which he divides into 20 lots. The $10,000 cost must be equitably apportioned among the lots so that on the sale of each A can determine his taxable gain or deductible loss.Example 2. B purchases for $25,000 property consisting of a used car lot and adjoining filling station. At the time, the fair market value of the filling station is $15,000 and the fair market value of the used car lot is $10,000. Five years later B sells the filling station for $20,000 at a time when $2,000 has been properly allowed as depreciation thereon. B's gain on this sale is $7,000, since $7,000 is the amount by which the selling price of the filling station exceeds the portion of the cost equitably allocable to the filling station at the time of purchase reduced by the depreciation properly allowed.(b)Nontaxable exchanges. Certain realized gains or losses on the sale or exchange of property are not "recognized", that is, are not included in or deducted from gross income at the time the transaction occurs. Gain or loss from such sales or exchanges is generally recognized at some later time. Examples of such sales or exchanges are the following: (1) Certain formations, reorganizations, and liquidations of corporations, see sections 331, 333, 337, 351, 354, 355, and 361;(2) Certain formations and distributions of partnerships, see sections 721 and 731;(3) Exchange of certain property held for productive use or investment for property of like kind, see section 1031;(4) A corporation's exchange of its stock for property, see section 1032;(5) Certain involuntary conversions of property if replaced, see section 1033;(6) Sale or exchange of residence if replaced, see section 1034;(7) Certain exchanges of insurance policies and annuity contracts, see section 1035; and(8) Certain exchanges of stock for stock in the same corporation, see section 1036.(c)Character of recognized gain. Under Subchapter P, Chapter 1 of the Code, relating to capital gains and losses, certain gains derived from dealings in property are treated specially, and under certain circumstances the maximum rate of tax on such gains is 25 percent, as provided in section 1201. Generally, the property subject to this treatment is a "capital asset", or treated as a "capital asset". For definition of such assets, see sections 1221 and 1231, and the regulations thereunder. For some of the rules either granting or denying this special treatment, see the following sections and the regulations thereunder: (1) Transactions between partner and partnership, section 707;(2) Sale or exchange of property used in the trade or business and involuntary conversions, section 1231;(3) Payment of bonds and other evidences of indebtedness, section 1232;(4) Gains and losses from short sales, section 1233;(5) Options to buy or sell, section 1234;(6) Sale or exchange of patents, section 1235;(7) Securities sold by dealers in securities, section 1236;(8) Real property subdivided for sale, section 1237;(9) Amortization in excess of depreciation, section 1238;(10) Gain from sale of certain property between spouses or between an individual and a controlled corporation, section 1239;(11) Taxability to employee of termination payments, section 1240.