7884 / How is gain from the disposition of an interest in an oil or natural gas property treated if depletion deductions have been taken?

Gain from the disposition of an interest in an oil or natural gas property is treated as ordinary income (“recaptured”) to the extent that depletion deductions reduced the adjusted basis of the oil and natural gas property.¹ Taxation of the recaptured amount may be deferred through use of an installment sale. However, income (other than interest) from an installment sale of an oil or natural gas property is treated as recaptured IRC Section1254 gain until all such gain is reported, and any remaining income is then treated as other than IRC Section1254 gain.²

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1. IRC § 1254.

2. Treas. Reg. § 1.1254-1(d).

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