[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.61-8]

[Page 44]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.61-8  Rents and royalties.

    (a) In general. Gross income includes rentals received or accrued 
for the occupancy of real estate or the use of personal property. For 
the inclusion of rents in income for the purpose of the retirement 
income credit, see section 37 and the regulations thereunder. Gross 
income includes royalties. Royalties may be received from books, 
stories, plays, copyrights, trademarks, formulas, patents, and from the 
exploitation of natural resources, such as coal, gas, oil, copper, or 
timber. Payments received as a result of the transfer of patent rights 
may under some circumstances constitute capital gain instead of ordinary 
income. See section 1235 and the regulations thereunder. For special 
rules for certain income from natural resources, see Subchapter I 
(section 611 and following), Chapter 1 of the Code, and the regulations 
thereunder.
    (b) Advance rentals; cancellation payments. Except as provided in 
section 467 and the regulations thereunder, gross income includes 
advance rentals, which must be included in income for the year of 
receipt regardless of the period covered or the method of accounting 
employed by the taxpayer. An amount received by a lessor from a lessee 
for cancelling a lease constitutes gross income for the year in which it 
is received, since it is essentially a substitute for rental payments. 
As to amounts received by a lessee for the cancellation of a lease, see 
section 1241 and the regulations thereunder.
    (c) Expenditures by lessee. As a general rule, if a lessee pays any 
of the expenses of his lessor such payments are additional rental income 
of the lessor. If a lessee places improvements on real estate which 
constitute, in whole or in part, a substitute for rent, such 
improvements constitute rental income to the lessor. Whether or not 
improvements made by a lessee result in rental income to the lessor in a 
particular case depends upon the intention of the parties, which may be 
indicated either by the terms of the lease or by the surrounding 
circumstances. For the exclusion from gross income of income (other than 
rent) derived by a lessor of real property on the termination of a 
lease, representing the value of such property attributable to buildings 
erected or other improvements made by a lessee, see section 109 and the 
regulations thereunder. For the exclusion from gross income of a lessor 
corporation of certain of its income taxes on rental income paid by a 
lessee corporation under a lease entered into before January 1, 1954, 
see section 110 and the regulations thereunder.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 8820, 64 FR 26851, May 18, 1999]