Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-18

1973-1 C.B. 368

Sec. 1033

IRS Headnote

Computation of the basis of land purchased and a building constructed thereon to replace land with a building sold under threat of condemnation by taxpayer who elects not to recognize gain realized on the sale.

Full Text

Rev. Rul. 73-18

Advice has been requested, under the circumstances described below, concerning the basis for Federal income tax purposes of property acquired as replacement property for property sold under a threat of condemnation.

Under threat of condemnation, a corporation sold land and a building located thereon to a state for 550x dollars. The corporation had an adjusted basis for the land of 200x dollars and an adjusted basis for the building (which had been depreciated on the straight line method) of 50x dollars, and thus had a gain of 300x dollars on the sale. The corporation property elected not to recognize the gain of 300x dollars in accordance with section 1033 of the Internal Revenue Code of 1954 and timely replaced the property by the purchase of land for 200x dollars and the construction of a building at a cost of 600x dollars.

Section 1033(c) of the Code provides, in part, that in the case of property purchased by a taxpayer in a transaction that results in the nonrecognition of any part of the gain realized as a result of a compulsory or involuntary conversion where the disposition of the converted property occurred after December 31, 1950, the basis of such property shall be its cost decreased in the amount of the gain not so recognized and if the property consists of more than one piece of property, the basis so determined shall be allocated to the purchased properties in proportion to their respective costs.

Accordingly, since the replacement property in the instant case consists of land and a building, the basis of 500x dollars (200x plus 600x less 300x) must be allocated between them in proportion to their respective costs. Thus, the basis of the land is 125x dollars and the basis of the building is 375x dollars.