Rollover of gain on sale of principal residence.

Under the general rule of Sec. 1034, the ownership of a new residence must be in the taxpayer's name if the taxpayer is to obtain nonrecognition of gain on the sale of his old principal residence.

There is an exception to the ownership rule in certain husband-wife situations. Under Sec. 1034(g), the old residence owned either by the taxpayer alone or jointly with his spouse may be sold and replaced with a new residence owned by either the taxpayer alone, the taxpayer's spouse alone or by them jointly.

The flush language of the subsection indicates the consent applies ". . . only if the old residence and the new residence are each used by the taxpayer and his spouse as their principal residence."

In Snowa, TC Memo 1995-336, the taxpayer failed to qualify for rollover treatment when she bought a new home, taking title jointly with her new husband.

The taxpayer and her husband (Spivey) sold their jointly owned home for $380,000 in November 1989 and obtained a divorce in the same year. The taxpayer filed as a single individual in 1989. She reported her half of the selling price ($190,000), amount realized ($178,000) and gain ($69,000) on Form 2119, Sale of Your Home, indicating she intended to acquire a replacement residence and not recognize the gain.

The taxpayer married Mr. Snowa in 1991. In March of that year, they jointly acquired a residence for $180,000. They filed a joint return for 1991, reporting the replacement residence. Both signed a consent to reduce the basis by the $69,000 gain. Mr. Snowa had not sold a principal residence and did not have a gain to defer. On audit, the IRS determined the taxpayer's share of the cost of the new residence was $90,000 and that the $69,000 gain must be recognized in 1989.

The Tax Court agreed with the Service. The court determined the phrase "taxpayer and his spouse" in Sec. 1034(g) meant the consent was available only when the taxpayer and the same spouse use the old and the new residence. The court cited Regs. Sec. 1.1034-1(f)(1), which clearly indicates this. (The petitioner advanced a semantic argument that "same spouse" does not mean the very same spouse, but only alike in kind. The court-indicated it did not think Congress intended to treat spouses as fungible goods.

Could the taxpayer have avoided the problem by taking title to the property in her name only, subsequently transferring an interest in it to Mr. Snowa, who would have guaranteed the mortgage?

The taxpayer made that argument, stating they took title jointly to avoid the expense of documenting two transfers. The court rejected this argument, basing its decision on what the taxpayer actually did, not on what she might have done.

In a footnote, the court stated that in such a case the petitioner would have to show that she would not have been legally obligated to transfer the interest to Mr. Snowa and that any funds he provided would have been a gift or loan to her.

From John Harper, CPA, Dunbar, Cook & Shepard, P.C., Indianapolis, Ind.