
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC1237]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        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
 
Sec. 1237. Real property subdivided for sale


(a) General

    Any lot or parcel which is part of a tract of real property in the 
hands of a taxpayer other than a C corporation shall not be deemed to be 
held primarily for sale to customers in the ordinary course of trade or 
business at the time of sale solely because of the taxpayer having 
subdivided such tract for purposes of sale or because of any activity 
incident to such subdivision or sale, if--
        (1) such tract, or any lot or parcel thereof, had not previously 
    been held by such taxpayer primarily for sale to customers in the 
    ordinary course of trade or business (unless such tract at such 
    previous time would have been covered by this section) and, in the 
    same taxable year in which the sale occurs, such taxpayer does not 
    so hold any other real property; and
        (2) no substantial improvement that substantially enhances the 
    value of the lot or parcel sold is made by the taxpayer on such 
    tract while held by the taxpayer or is made pursuant to a contract 
    of sale entered into between the taxpayer and the buyer. For 
    purposes of this paragraph, an improvement shall be deemed to be 
    made by the taxpayer if such improvement was made by--
            (A) the taxpayer or members of his family (as defined in 
        section 267(c)(4)), by a corporation controlled by the taxpayer, 
        an S corporation which included the taxpayer as a shareholder, 
        or by a partnership which included the taxpayer as a partner; or
            (B) a lessee, but only if the improvement constitutes income 
        to the taxpayer; or
            (C) Federal, State, or local government, or political 
        subdivision thereof, but only if the improvement constitutes an 
        addition to basis for the taxpayer; and

        (3) such lot or parcel, except in the case of real property 
    acquired by inheritance or devise, is held by the taxpayer for a 
    period of 5 years.

(b) Special rules for application of section

                              (1) Gains

        If more than 5 lots or parcels contained in the same tract of 
    real property are sold or exchanged, gain from any sale or exchange 
    (which occurs in or after the taxable year in which the sixth lot or 
    parcel is sold or exchanged) of any lot or parcel which comes within 
    the provisions of paragraphs (1), (2) and (3) of subsection (a) of 
    this section shall be deemed to be gain from the sale of property 
    held primarily for sale to customers in the ordinary course of the 
    trade or business to the extent of 5 percent of the selling price.

                      (2) Expenditures of sale

        For the purpose of computing gain under paragraph (1) of this 
    subsection, expenditures incurred in connection with the sale or 
    exchange of any lot or parcel shall neither be allowed as a 
    deduction in computing taxable income, nor treated as reducing the 
    amount realized on such sale or exchange; but so much of such 
    expenditures as does not exceed the portion of gain deemed under 
    paragraph (1) of this subsection to be gain from the sale of 
    property held primarily for sale to customers in the ordinary course 
    of trade or business shall be so allowed as a deduction, and the 
    remainder, if any, shall be treated as reducing the amount realized 
    on such sale or exchange.

                     (3) Necessary improvements

        No improvement shall be deemed a substantial improvement for 
    purposes of subsection (a) if the lot or parcel is held by the 
    taxpayer for a period of 10 years and if--
            (A) such improvement is the building or installation of 
        water, sewer, or drainage facilities or roads (if such 
        improvement would except for this paragraph constitute a 
        substantial improvement);
            (B) it is shown to the satisfaction of the Secretary that 
        the lot or parcel, the value of which was substantially enhanced 
        by such improvement, would not have been marketable at the 
        prevailing local price for similar building sites without such 
        improvement; and
            (C) the taxpayer elects, in accordance with regulations 
        prescribed by the Secretary, to make no adjustment to basis of 
        the lot or parcel, or of any other property owned by the 
        taxpayer, on account of the expenditures for such improvements. 
        Such election shall not make any item deductible which would not 
        otherwise be deductible.

(c) Tract defined

    For purposes of this section, the term ``tract of real property'' 
means a single piece of real property, except that 2 or more pieces of 
real property shall be considered a tract if at any time they were 
contiguous in the hands of the taxpayer or if they would be contiguous 
except for the interposition of a road, street, railroad, stream, or 
similar property. If, following the sale or exchange of any lot or 
parcel from a tract of real property, no further sales or exchanges of 
any other lots or parcels from the remainder of such tract are made for 
a period of 5 years, such remainder shall be deemed a tract.

(Aug. 16, 1954, ch. 736, 68A Stat. 330; Apr. 27, 1956, ch. 214, Secs. 1, 
2, 70 Stat. 118; Pub. L. 85-866, title I, Sec. 55, Sept. 2, 1958, 72 
Stat. 1645; Pub. L. 91-686, Sec. 2(a), Jan. 12, 1971, 84 Stat. 2071; 
Pub. L. 94-455, title XIX, Secs. 1901(a)(138), 1906(b)(13)(A), Oct. 4, 
1976, 90 Stat. 1787, 1834; Pub. L. 104-188, title I, Sec. 1314, Aug. 20, 
1996, 110 Stat. 1785.)


                               Amendments

    1996--Subsec. (a). Pub. L. 104-188, Sec. 1314(a), substituted 
``other than a C corporation'' for ``other than a corporation'' in 
introductory provisions.
    Subsec. (a)(2)(A). Pub. L. 104-188, Sec. 1314(b), inserted ``an S 
corporation which included the taxpayer as a shareholder,'' after 
``controlled by the taxpayer,''.
    1976--Subsec. (b)(3)(B), (C). Pub. L. 94-455, Sec. 1906(b)(13)(A), 
struck out ``or his delegate'' after ``Secretary''.
    Subsec. (d). Pub. L. 94-455, Sec. 1901(a)(138), struck out effective 
date provision making the section applicable only with respect to sales 
of property occurring after Dec. 31, 1953, except that for purposes of 
subsec. (c) defining tract of real property and for determining the 
number of sales under subsec. (b)(1) of this section, all sales of lots 
and parcels from any tract of real property during the period of 5 years 
before Dec. 31, 1953, shall be taken into account, except as provided in 
subsec. (c).
    1971--Subsec. (a). Pub. L. 91-686, Sec. 2(a)(1), substituted ``other 
than a corporation'' for ``(including corporations only if no 
shareholder directly or indirectly holds real property for sale to 
customers in the ordinary course of trade or business and only in the 
case of property described in the last sentence of subsection (b)(3))''.
    Subsec. (b). Pub. L. 91-686, Sec. 2(a)(2), struck out sentence which 
made subpars. (B) and (C) inapplicable in the case of property acquired 
through the foreclosure of a lien thereon which secured the payment of 
an indebtedness to the taxpayer or (in the case of a corporation) to a 
creditor who has transferred the foreclosure bid to the taxpayer in 
exchange for all of its stock and other consideration and in the case of 
property adjacent to such property if 80 percent of the real property 
owned by the taxpayer was property described in the first part of the 
sentence.
    1958--Subsec. (a)(1). Pub. L. 85-866 substituted ``and, in the same 
taxable year'' for ``or, in the same taxable year''.
    1956--Subsec. (a). Act Apr. 27, 1956, Sec. 1, substituted 
``(including corporations only if no shareholder directly or indirectly 
holds real property for sale to customers in the ordinary course of 
trade or business and only in the case of property described in the last 
sentence of subsection (b)(3))'' for ``other than a corporation''.
    Subsec. (b)(3). Act Apr. 27, 1956, Sec. 2, substituted ``water, 
sewer, or drainage facilities'' for ``water or sewer facilities'' in 
subpar. (A), and inserted provision at end that requirements of subpars. 
(B) and (C) do not apply to certain specified property.


                    Effective Date of 1996 Amendment

    Amendment by Pub. L. 104-188 applicable to taxable years beginning 
after Dec. 31, 1996, see section 1317(a) of Pub. L. 104-188, set out as 
a note under section 641 of this title.


                    Effective Date of 1976 Amendment

    Amendment by section 1901(a)(138) of Pub. L. 94-455 applicable with 
respect to taxable years beginning after Dec. 31, 1976, see section 
1901(d) of Pub. L. 94-455, set out as a note under section 2 of this 
title.


                    Effective Date of 1971 Amendment

    Section 2(b) of Pub. L. 91-686 provided that: ``The amendments made 
by subsection (a) [amending this section] shall be effective for taxable 
years beginning after the date of enactment of this Act [Jan. 12, 
1971].''


                    Effective Date of 1958 Amendment

    Amendment by Pub. L. 85-866 applicable to taxable years beginning 
after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c)(1) 
of Pub. L. 85-866, set out as a note under section 165 of this title.


                    Effective Date of 1956 Amendment

    Section 3 of act Apr. 27, 1956, provided that: ``This Act [amending 
this section] shall apply to all taxable years beginning after Dec. 31, 
1954.''


 Sales or Exchanges by Corporations of Real Property Held More Than 25 
                                  Years

    Section 1 of Pub. L. 91-686, as amended by Pub. L. 99-514, Sec. 2, 
Oct. 22, 1986, 100 Stat. 2095, provided: ``That (a) for purposes of the 
Internal Revenue Code of 1986 [formerly I.R.C. 1954] any lot or parcel 
of real property sold or exchanged by a corporation which would, but for 
this Act, be treated as property held primarily for sale to customers in 
the ordinary course of trade or business shall not, except to the extent 
provided in (b), be so treated if--
        ``(1) no shareholder of the corporation directly or indirectly 
    holds real property primarily for sale to customers in the ordinary 
    course of trade or business; and
        ``(2)(A) such lot or parcel is a part of real property (i) held 
    for more than twenty-five years at the time of sale or exchange, and 
    (ii) acquired before January 1, 1934, by the corporation as a result 
    of the foreclosure of a lien (or liens) thereon which secured the 
    payment of indebtedness held by one or more creditors who 
    transferred one or more foreclosure bids to the corporation in 
    exchange for all its stock (with or without other consideration), or
        ``(B)(i) such lot or parcel is a part of additional real 
    property acquired before January 1, 1957, by the corporation in the 
    near vicinity of any real property to which subparagraph (A) 
    applies, or
        ``(ii) such lot or parcel is wholly or to some extent a part of 
    any minor acquisition made after December 31, 1956, by the 
    corporation to adjust boundaries, to fill gaps in previously 
    acquired property, to facilitate the installation of streets, 
    utilities, and other public facilities, or to facilitate the sale of 
    adjacent property, or
        ``(iii) such lot or parcel is wholly or to some extent a part of 
    a reacquisition by the corporation after December 31, 1956, of 
    property previously owned by the corporation;

    but only if at least 80 percent (as measured by area) of the real 
    property sold or exchanged by the corporation within the taxable 
    year is property described in subparagraph (A); and
        ``(3) there were no acquisitions of real property by the 
    corporation after December 31, 1956, other than--
            ``(A) acquisitions described in paragraph (2)(B)(ii) and 
        reacquisitions described in paragraph (2)(B)(iii), or
            ``(B) acquisitions of real property used in a trade or 
        business of the corporation or held for investment by the 
        corporation; and
        ``(4) the corporation did not after December 31, 1957, sell or 
    exchange (except in condemnation or under threat of condemnation) 
    any residential lot or parcel on which, at the time of the sale or 
    exchange, there existed any substantial improvements (other than 
    improvements in existence at the time the land was acquired by the 
    corporation) except subdivision, clearing, grubbing, and grading, 
    building or installation of water, sewer, and drainage facilities, 
    construction of roads, streets, and sidewalks, and installation of 
    utilities.''
In any case in which a corporation referred to in paragraphs (1), (2), 
(3), and (4) is a member of an affiliated group as defined in section 
1504(a) of the Internal Revenue Code of 1986, such affiliated group 
shall, for purposes of such paragraphs, be treated as a single 
corporation.
    ``(b)(1) Gain from any sale or exchange described in subsection (a) 
shall be deemed, for purposes of such Code, to be gain from the sale of 
property held primarily for sale to customers in the ordinary course of 
trade or business to the extent of 5 percent of the selling price.
    ``(2) For the purpose of computing gain under paragraph (1), 
expenditures incurred in connection with the sale or exchange of any lot 
or parcel shall neither be allowed as a deduction in computing taxable 
income, nor treated as reducing the amount realized on such sale or 
exchange; but so much of such expenditures as does not exceed the 
portion of gain deemed under paragraph (1) to be gain from the sale of 
property held primarily for sale to customers in the ordinary course of 
trade or business shall be so allowed as a deduction, and the remainder, 
if any, shall be treated as reducing the amount realized on such sale or 
exchange.
    ``(c) The provisions of subsections (a) and (b) shall apply to 
taxable years beginning after December 31, 1957, and before January 1, 
1984.''

                  Section Referred to in Other Sections

    This section is referred to in section 162 of this title.
