Section 24271(d) - * Gains Derived from Dealings in Property(1) In General. Gain realized on the sale or exchange of property is included in gross income, unless excluded by law. For this purpose property includes tangible items, such as a building, and intangible items, such as goodwill. Generally, the gain is the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged. The specific rules for computing the amount of gain or loss are contained in Section 24901 and the regulations thereunder. When a part of a larger property is sold, the cost or other basis of the entire property shall be equitably apportioned among the several parts, and the gain realized or loss sustained on the part of the entire property sold is the difference between the selling price and the cost or other basis allocated to such part. The sale of each part is treated as a separate transaction and gain or loss shall be computed separately on each part. Thus, gain or loss shall be determined at the time of sale of each part and not deferred until the entire property has been disposed of. This rule may be illustrated by the following examples EXAMPLE (1).
Corporation A acquires a 10-acre tract for $10,000, which it divides into 20 lots. The $10,000 cost must be equitably apportioned among the lots so that on the sale of each, Corporation A can determine its taxable gain or deductible loss.
EXAMPLE (2).
Corporation B purchases for $25,000 property consisting of a used car lot and adjoining filling station. At the time, the fair market value of the filling station is $15,000 and the fair market value of the used car lot is $10,000. Five years later Corporation B sells the filling station for $20,000 at a time when $2,000 has been properly allowed as a depreciation thereon. Corporation B's gain on this sale is $7,000, since $7,000 is the amount by which the selling price of the filling station exceeds the portion of the cost equitably allocable to the filling station at the time of purchase reduced by the depreciation properly allowed.
(2) Nontaxable Exchanges. Certain realized gains or losses on the sale or exchange of property are not "recognized," that is, are not included in or deducted from gross income at the time the transaction occurs. Gain or loss from such sales or exchanges is generally recognized at some later time. Examples of such sales or exchanges are the following:(A) Certain formations, reorganizations, and liquidations of corporations, see Sections 24501, 24503, 24512, 24513, 24514, 24521, 24531, 24532, 24533, and 24551.(B) Exchange of certain property held for productive use or investment for property of like kind, see Section 24941;(C) Certain involuntary conversions of property, if replaced, see Sections 24943 through 24949.2;(D) Certain exchanges of insurance policies and annuity contracts, see Section 24950; and(E) Certain exchanges of stock for stock in the same corporation, see Section 24951. __________
* Except for provisions relating to capital assets, this regulation is substantially the same as Section 26 CFR 1.61-6.
Cal. Code Regs. Tit. 18, § 24271(d)