---
kind: "section"
citation: "26 U.S.C. § 1255"
title: "26"
title_heading: "Internal Revenue Code"
number: "1255"
heading: "Gain from disposition of section 126 property"
release: "119-102"
date: "2026-07-12"
url: "https://uscodex.org/usc/26/1255"
units:
  - "Subtitle A — Income Taxes"
  - "Chapter 1 — Normal Taxes and Surtaxes"
  - "Subchapter P — Capital Gains and Losses"
  - "Part IV — Special Rules for Determining Capital Gains and Losses"
---

# §1255. Gain from disposition of section 126 property

- (a) **General rule—**
  - (1) **Ordinary income—** Except as otherwise provided in this section, if [section 126](/usc/26/126.md) [property](/usc/26/317.md?p=a) is disposed of, the lower of—
    - (A) the [applicable percentage](/usc/26/414.md?p=l-2-B) of the aggregate payments, with respect to such [property](/usc/26/317.md?p=a), excluded from gross income under [section 126](/usc/26/126.md), or
    - (B) the excess of—
      - (i) the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market [value](/usc/26/851.md?p=c-4) of such [section 126](/usc/26/126.md) [property](/usc/26/317.md?p=a) (in the case of any other [disposition](/usc/26/424.md?p=c-1)), over
      - (ii) the adjusted basis of such [property](/usc/26/317.md?p=a),

      shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle, except that this section shall not apply to the extent such gain is recognized as ordinary income under any other provision of this part.

  - (2) **Section 126 property—** For purposes of this section, “[section 126](/usc/26/126.md) [property](/usc/26/317.md?p=a)” means any [property](/usc/26/317.md?p=a) acquired, improved, or otherwise modified by the application of payments excluded from gross income under section 126.
  - (3) **Applicable percentage—** For purposes of this section, if [section 126](/usc/26/126.md) [property](/usc/26/317.md?p=a) is disposed of less than 10 years after the date of receipt of payments excluded from gross income under [section 126](/usc/26/126.md), the [applicable percentage](/usc/26/414.md?p=l-2-B) is 100 percent. If [section 126](/usc/26/126.md) [property](/usc/26/317.md?p=a) is disposed of more than 10 years after such date, the [applicable percentage](/usc/26/414.md?p=l-2-B) is 100 percent reduced (but not below zero) by 10 percent for each year or part thereof in excess of 10 years such [property](/usc/26/317.md?p=a) was held after the date of receipt of the payments.
- (b) **Special rules—** Under regulations prescribed by the Secretary—
  - (1) rules similar to the rules applicable under [section 1245](/usc/26/1245.md) shall be applied for purposes of this section, and
  - (2) for purposes of sections [170(e)](/usc/26/170.md?p=e) and [751(c)](/usc/26/751.md?p=c), amounts treated as ordinary income under this section shall be treated in the same manner as amounts treated as ordinary income under section 1245.

## Source credit

(Added Pub. L. 95–600, title V, § 543(c)(1), Nov. 6, 1978, 92 Stat. 2890; amended Pub. L. 96–222, title I, § 105(a)(7)(B), (D), Apr. 1, 1980, 94 Stat. 221; Pub. L. 96–471, § 2(b)(6), Oct. 19, 1980, 94 Stat. 2254; Pub. L. 99–514, title V, § 511(d)(2)(A), title VI, § 631(e)(14), Oct. 22, 1986, 100 Stat. 2248, 2275; Pub. L. 100–647, title I, § 1005(c)(10), Nov. 10, 1988, 102 Stat. 3392; Pub. L. 108–27, title III, § 302(e)(4)(B)(ii), May 28, 2003, 117 Stat. 764; Pub. L. 115–141, div. U, title IV, § 401(a)(175), Mar. 23, 2018, 132 Stat. 1192.)

## Notes

### Editorial Notes

### Amendments

2018—Subsec. (b)(2). Pub. L. 115–141 substituted “170(e)” for “170(e),”.

2003—Subsec. (b)(2). Pub. L. 108–27 struck out “, 341(e)(12),” after “170(e)”.

1988—Subsec. (b)(2). Pub. L. 100–647 amended Pub. L. 99–514, § 511(d)(2)(A), see 1986 Amendment note below.

1986—Subsec. (b)(2). Pub. L. 99–514, § 511(d)(2)(A), as amended by Pub. L. 100–647, struck out “163(d),” after “sections”.

Pub. L. 99–514, § 631(e)(14), struck out “453B(d)(2)” after “341(e)(12),”.

1980—Subsec. (a)(1)(B). Pub. L. 96–222, § 105(a)(7)(B), inserted following cl. (ii) provisions requiring that such gain be recognized notwithstanding any other provision of this subtitle, except that this section shall not apply to the extent such gain is recognized as ordinary income under any other provision of this part.

Subsec. (b)(2). Pub. L. 96–471 substituted “453B(d)(2)” for “453(d)(4)(B)”.

Pub. L. 96–222, § 105(a)(7)(D), inserted “for purposes of sections 163(d), 170(e), 341(e)(12), 453(d)(4)(B), and 751(c)” before “amounts treated as”.

### Statutory Notes and Related Subsidiaries

### Effective Date of 2003 Amendment

Amendment by Pub. L. 108–27 applicable, except as otherwise provided, to taxable years beginning after Dec. 31, 2002, see section 302(f) of Pub. L. 108–27, set out as an Effective and Termination Dates of 2003 Amendment note under section 1 of this title.

### Effective Date of 1988 Amendment

Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

### Effective Date of 1986 Amendment

Amendment by section 511(d)(2)(A) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, see section 511(e) of Pub. L. 99–514, set out as a note under section 163 of this title.

Amendment by section 631(e)(14) of Pub. L. 99–514 applicable to any distribution in complete liquidation, and any sale or exchange, made by a corporation after July 31, 1986, unless such corporation is completely liquidated before Jan. 1, 1987, any transaction described in section 338 of this title for which the acquisition date occurs after Dec. 31, 1986, and any distribution, not in complete liquidation, made after Dec. 31, 1986, with exceptions and special and transitional rules, see section 633 of Pub. L. 99–514, set out as an Effective Date note under section 336 of this title.

### Effective Date of 1980 Amendments

For effective date of amendment by Pub. L. 96–471, see section 6(a)(1) of Pub. L. 96–471, set out as an Effective Date note under section 453 of this title.

Amendment by Pub. L. 96–222 effective, except as otherwise provided, as if it had been included in the provisions of the Revenue Act of 1978, Pub. L. 95–600, to which such amendment relates, see section 201 of Pub. L. 96–222, set out as a note under section 32 of this title.

### Effective Date

Section effective with respect to grants made under the programs after Sept. 30, 1979, see section 543(d) of Pub. L. 95–600, set out as a note under section 126 of this title.