GAIN FROM DISPOSITIONS OF CERTAIN DEPRECIABLE REALTY.

SEC. 231. GAIN FROM DISPOSITIONS OF CERTAIN DEPRECIABLE REALTY. (a) Gain From Dispositions of Certain Depreciable Realty.—Part IV of subchapter P of chapter 1 (relating to special rules for determining capital gains and losses) is amended by adding at the end thereof the following new section: “SEC. 1250. GAIN FROM DISPOSITIONS OF CERTAIN DEPRECIABLE REALTY. “(a) General Rule.— “(1) Ordinary income.—Except as otherwise provided in this section, if section 1250 property is disposed of after December 31, 1963, the applicable percentage of the lower of— “(A) the additional depreciation (as defined in subsection (b)(1)) in respect of the property, or “(B) the excess of— “(i) the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such property (in the case of any other disposition), over “(ii) the adjusted basis of such property, shall be treated as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231. Such gain shall he recognized notwithstanding any other provision of this subtitle. “(2) Applicable percentage.—For purposes of paragraph (1), the term ‘applicable percentage’ means 100 percent minus 78 Stat. 101one percentage point for each full month the property was held after the date on which the property was held 20 full months. “(b) Additional Depreciation Defined.—For purposes of this section— “(1) In general.—The term ‘additional depreciation’ means, in the case of any property, the depreciation adjustments in respect of such property; except that, in the case of property held more than one year, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined for each taxable year under the straight line method of adjustment. For purposes of the preceding sentence, if a useful life (or salvage value) was used in determining the amount allowed as a deduction for any taxable year, such fife (or value) shall be used in determining the depreciation adjustments which would have resulted for such year under the straight line method. “(2) Property held by lessee.—In the case of a lessee, in determining the depreciation adjustments which would have resulted in respect of any building erected (or other improvement made) on the leased property, or in respect of any cost of acquiring the lease, the lease period shall be treated as including all renewal periods. For purposes of the preceding sentence— “(A) the term ‘renewal period’ means any period for which the lease may be renewed, extended, or continued pursuant to an option exercisable by the lessee, but “(B) the inclusion of renewal periods shall not extend the period taken into account by more than ⅔ of the period on the basis of which the depreciation adjustments were allowed. “(3) Depreciation adjustments.—The term ‘depreciation adjustments’ means, in respect of any property, all adjustments attributable to periods after December 31, 1963, reflected in the adjusted basis of such property on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for exhaustion, wear and tear, obsolescence, or amortization (other than amortization under section 168). For purposes of the preceding sentence, if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed. “(c) Section 1250 Property.—For purposes of this section, the term ‘section 1250 property’ means any real property (other than section 1245 property, as defined in section 1245(a)(3)) which is or has been property of a character subject to the allowance for depreciation provided in section 167. “(d) Exceptions and Limitations.— “(1) Gifts.—Subsection (a) shall not apply to a disposition by gift. “(2) Transfers at death.—Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death. “(3) Certain tax-free trans actions.—If the basis of property in the hands of a transferee is determined by reference to its oasis in the hands of the transferor by reason of the application of section 332, 351, 361, 371(a), 374(a), 721, or 731, then the amount of gain taken into account by the transferor under subsection (a) (1) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). This paragraph shall not apply to a disposition 78 Stat. 102to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter. “(4) Like kind exchanges; involuntary conversions, etc.— “(A) Recognition limit.—If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a) (1) shall not exceed the greater of the following: “(i) the amount of 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.—With respect to any transaction, the increase provided by this subparagraph is the amount equal to the fair market value of any stock purchased in a corporation which (but for this paragraph) would result in nonrecognition of gain under section 1033 (a)(3)(A). “(C) Adjustment where insufficient section 1250 property is acquired.—With respect to any transaction, the amount determined under this subparagraph shall be the excess of— “(i) the amount of gain which would (but for this paragraph) be taken into account under subsection (a) (1), over “(ii) the fair market value (or cost in the case of a transaction described in section 1033(a)(3)) of the section 1250 property acquired in the transaction. “(D) Basis of property acquired.—In the case of property purchased by the taxpayer in a transaction described in section 1033(a)(3), in applying the last sentence of section 1033(c), such sentence shall be applied— “(i) first solely to section 1250 properties and to the amount of gain not taken into account under subsection (a)(1) by reason of this paragraph, and “(ii) then to all purchased properties to which such sentence applies and to the remaining gain not recognized on the transaction as if the cost of the section 1250 properties were the basis of such properties computed under clause (i). In the case of property acquired in any other transaction to which this paragraph applies, rules consistent with the preceding sentence shall be applied under regulations prescribed by the Secretary or his delegate. “(E) Additional depreciation with respect to property disposed of.—In the case of any transaction described in section 1031 or 1033, the additional depreciation in respect of the section 1250 property acquired which is attributable to the section 1250 property disposed of shall be an amount equal to the amount of the gain which was not taken into account, under subsection (a)(1) by reason of the application of this paragraph. “(5) Section 1071 and 1081 transactions.—Under regulations prescribed by the Secretary or his delegate, rules consistent with paragraphs (3) and (4) of this subsection and with subsections (e) and (f) shall apply in the case of transactions described in section 1071 (relating to gain from sale or exchange to effectuate 78 Stat. 103policies of FCC) or section 1081 (relating to exchanges in obedience to SEC orders). “(6) Property distributed by a partnership to a partner.— “(A) In general.—For purposes of this section, the basis of section 1250 property distributed by a partnership to a partner shall be deemed to be determined by reference to the adjusted basis of such property to the partnership. “(B) Additional depreciation.—In respect of any property described in subparagraph (A), the additional depreciation attributable to periods before the distribution by the partnership shall be— “(i) the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time and the applicable percentage for the property had been 100 percent, reduced by “(ii) if section 751(b) applied to any part of such gain, the amount of such gain to which section 751(b) would have applied if the applicable percentage for the property had been 100 percent. “(7) Disposition or principal residence.—Subsection (a) shall not apply to a disposition of— “(A) property to the extent used by the taxpayer as his principal residence (within the meaning of section 1034, relating to sale or exchange of residence), and “(B) property in respect of which the taxpayer meets the age and ownership requirements of section 121 (relating to gains from sale or exchange of residence of individual who has attained the age of 65) but only to the extent that he meets the use requirements of such section in respect of such property. “(e) Holding Period.—For purposes of determining the applicable percentage under this section, the provisions of section 1223 shall not apply, and the holding period of section 1250 property shall be determined under the following rules: “(1) Beginning of holding period.—The holding period of section 1250 property shall be deemed to begin— “(A) in the case of property acquired by the taxpayer, on the day after the date of acquisition, or “(B) in the case of property constructed, reconstructed, or erected by the taxpayer, on the first day of the month during 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), (3), or (5) of subsection (d) is determined by reference to its basis in the hands of the transferor, then the holding period of the property in the hands of the transferee shall include the holding period of the property in the hands of the transferor. “(3) Principal residence.—If the basis of property acquired in a transaction described in paragraph (7) of subsection (d) is determined by reference to the basis in the hands of the taxpayer of other property, then the holding period of the property acquired shall include the holding period of such other property. “(f) Special Rules for Property Which Is Substantially Improved.— “(1) Amount treated as ordinary income.—If, in the case of a disposition of section 1250 property, the property is treated as consisting of more than one element by reason of paragraph 78 Stat. 104(3), then the amount taken into account under subsection (a) (1) in respect of such section 1250 property as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231 shall be the sum of the amounts determined under paragraph (2). “(2) Ordinary income attributable to an element.—For purposes of paragraph (1), the amount taken into account for any element shall be the amount determined by multiplying— “(A) the amount which bears the same ratio to the lower of the amounts specified in subparagraph (A) or (B) of subsection (a) (1) for the section 1250 property as the additional depreciation for such element bears to the sum of the additional depreciation for all elements, by “(B) the applicable percentage for such element. For purposes of this paragraph, determinations with respect to any element shall be made as if it were a separate property. “(3) Property consisting of more than one element.—In applying this subsection in the case of any section 1250 property, there shall be treated as a separate element— “(A) each separate improvement, “(B) if, before completion of section 1250 property, units thereof (as distinguished from improvements) were placed in service, each such unit of section 1250 property, and “(C) the remaining property which is not taken into account under subparagraphs (A) and (B). “(4) Property which is substantially improved.—For purposes of this subsection— “(A) In general.—The term ‘separate improvement means each improvement added during the 36-month period ending on the last day of any taxable year to the capital account for the property, but only if the sum of the amounts added to such account during such period exceeds the greatest of— “(i) 25 percent of the adjusted basis of the property, “(ii) 10 percent of the adjusted basis of the property, determined without regard to the adjustments provided in paragraphs (2) and (3) of section 1016(a), or “(iii) $5,000. For purposes of clauses (i) and (ii), the adjusted basis of the property shall be determined as of the beginning of the first day of such 36-month period, or of the holding period of the property (within the meaning of subsection (e)), whichever is the later. “(B) Exception.—Improvements in any taxable year shall be taken into account for purposes of subparagraph (A) only if the sum of the amounts added to the capital account for the property for such taxable year exceeds the greater of— “(i) $2,000, or “(ii) one percent of the adjusted basis referred to in subparagraph (A) (ii), determined, however, as of the beginning of such taxable year. For purposes of this section, if the amount added to the capital account for any separate improvement does not exceed the greater of clause (i) or (ii), such improvement shall be treated as placed in service on the first day, of a calendar month, which is closest to the middle of the taxable year. “(C) Improvement.—The term ‘improvement’ means, in the case of any section 1250 property, any addition to capital 78 Stat. 105account for such property after the initial acquisition or after completion of the property. “(g) Adjustments to Basis.—The Secretary or his delegate shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (a). “(h) Application of Section.—This section shall apply notwithstanding any other provision of this subtitle.” (b) Technical Amendments.— (1) Special rule for charitable contributions.— (A) The heading of section 170(e) (relating to special rule for charitable contributions of section 1245 property) is amended by striking out “Section 1245 Property” and inserting in lieu thereof “Certain Property”. (B) The text of such section 170(e) is amended by striking out “section 1245(a)” and inserting in lieu thereof “section 1245(a) or 1250(a)”. (2) Corporate distributions of property.—Subsections (b) and (d) of section 301 (relating to amount distributed) are each amended by striking out “under section 1245(a)” and inserting in lieu thereof “under section 1245 (a) or 1250 (a) ”. (3) Effect on earnings and profits.—Paragraph (3) of section 312(c) (relating to adjustments of earnings and profits) is amended by striking out “or under section 1245(a)” and inserting in lieu thereof “or under section 1245(a) or 1250(a)”. (4) Collapsible corporations.—Paragraph (12) of section 341(e) (relating to collapsible corporations) is amended by striking out “section 1245(a)” and inserting in lieu thereof “sections 1245(a) and 1250(a)”. (5) Installment obligations in certain liquidations.—Subparagraphs (A) and (B) of section 453(d) (4) (relating to distribution of installment obligations in certain corporate liquidations) are each amended by striking out “section 1245(a)” and inserting in lieu thereof “section 1245(a) or 1250(a) ”, (6) Special rule for partnerships.—Section 751(c) (relating to definition of “unrealized receivables” for purposes of subchapter K) is amended by striking out “(as defined in section 1245 (a) (3))” and inserting in lieu thereof “(as defined in section 1245 (a)(3)) and section 1250 property (as defined in section 1250(c))” and by striking out “to which section 1245(a)” and inserting in lieu thereof “to which section 1245(a) or 1250(a)”. (7) The table of sections for part IV of subchapter P of chapter 1 is amended by adding at the end thereof the following: “Sec. 1250. Gain from dispositions of certain depreciable realty.” (c) Effective Date.—The amendments made by this section shall apply to dispositions after December 31, 1963, in taxable years ending after such date.