[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1019-1]

[Page 76-77]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
GAIN OR LOSS ON DISPOSITION OF PROPERTY--Table of Contents
 
Sec. 1.1019-1  Property on which lessee has made improvements.

    In any case in which a lessee of real property has erected buildings 
or made other improvements upon the leased property and the lease is 
terminated by

[[Page 77]]

forfeiture or otherwise resulting in the realization by such lessor of 
income which, were it not for the provisions of section 109, would be 
includible in gross income of the lessor, the amount so excluded from 
gross income shall not be taken into account in determining the basis or 
the adjusted basis of such property or any portion thereof in the hands 
of the lessor. If, however, in any taxable year beginning before January 
1, 1942, there has been included in the gross income of the lessor an 
amount representing any part of the value of such property attributable 
to such buildings or improvements, the basis of each portion of such 
property shall be properly adjusted for the amount so included in gross 
income. For example, A leased in 1930 to B for a period of 25 years 
unimproved real property and in accordance with the terms of the lease B 
erected a building on the property. It was estimated that upon 
expiration of the lease the building would have a depreciated value of 
$50,000, which value the lessor elected to report (beginning in 1931) as 
income over the term of the lease. This method of reporting was used 
until 1942. In 1952 B forfeits the lease. The amount of $22,000 reported 
as income by A during the years 1931 to 1941, inclusive, shall be added 
to the basis of the property represented by the improvements in the 
hands of A. If in such case A did not report during the period of the 
lease any income attributable to the value of the building erected by 
the lessee and the lease was forfeited in 1940 when the building was 
worth $75,000, such amount, having been included in gross income under 
the law applicable to that year, is added to the basis of the property 
represented by the improvements in the hands of A. As to treatment of 
such property for the purposes of capital gains and losses, see 
subchapter P (section 1201 and following), chapter 1 of the Code.